Fundraising is a technique of financing. It involves bringing investors in the share capital of a company. Investors bring funds to the company and receive securities in return. In the world of start-ups, fundraising is an essential subject.
What is a Fundraiser?
A fundraiser is an operation that brings investors into the share capital of a company. These investors bring money to the company and in return acquire a stake in its share capital.
Fundraising is mainly aimed at high-potential companies and innovative businesses. Investors are interested in the future value of the business. The goal is to realize a capital gain on the future resale of the securities.
Benefits of Fundraising
The main advantage of fundraising lies in the contribution of new funds to society by investors. The money invested should not be repaid, it is a capital contribution.
Also, a fundraiser can allow a company to enjoy new skills and new business opportunities. Thanks to the network of investors.
Disadvantage of Fundraising
The main disadvantage of fundraising corresponds to the dilution of the participation of the partners following the entry of new partners in the share capital of the company. The historic partners see their percentage of participation, and thus their rights in the company, decreasing after the operation.
Then, the investors who enter the share capital can have a different vision from that of the historical partners. The objectives are not the same and it is a potential source of tension.
Different Types of Fundraising
There are different types of fundraising, depending on the progress of the company that initiates the operation: seed capital and development capital.
Fundraising to Start a Project (Seed Capital)
The seed capital is to raise funds for starting a business, the launch of a service or product.
This first fundraising is not the one with the largest amount. Indeed, the company is still poorly valued compared to its future potential. Here, it is a question of obtaining the financial means necessary to concretize a project.
Fundraising to Develop a Project (Development Capital)
These fundraisers have larger amounts than seed capital. The valuation already acquired by the company must allow the partners to limit their dilution in the share capital.
Why Raise Funds?
Fundraising should be considered only when it is really necessary for the development of the company and the achievement of its objectives. There must be a real need for funding. Without fundraising, the company cannot reach the planned objectives within the desired timeframe.
In return for fundraising, the founding partners reduce their percentage of participation in the share capital of the company: less voting rights at meetings, fewer dividends, less share of capital gain in the event of a sale.
The entry of investors into share capital must be offset by the development potential that can be visualized, thanks to the new means they bring to society.
Fundraising should not be considered an essential step for a start-up. Its interest depends on the activity of the company, its needs, its objectives and the means which it already has.
How to Prepare and Raise Funds?
The main stages in raising funds are as follows:
- Prepare the fundraising project,
- Find investors and negotiate the conditions of the fundraising,
- Complete the fundraising.
Prepare a Fundraiser
Preparing for a fundraiser involves:
- Justifying its usefulness: why does society need to raise funds? what is the project?
- Valuing society: to raise funds, society must be valued.
To get investors to join the project, it is necessary to explain to them the interest of raising funds: what are the objectives of the operation? what is the amount sought? how will the funds be used? The creation of a business plan helps structure the process.
This work must be done with the greatest care because the investors who intervene in fundraising are experienced professionals. A solid and justified project is essential for a successful operation.
Then, the valuation of the company is decisive for the future distribution of the share capital between the partners already present and the new entrants (the investors).
Find Investors and Negotiate Fundraising Conditions
To raise funds, it is obviously necessary to find investors and convince them to take a stake . The work is carried out in two stages.
First, find investors and convince them to join the project. What interests the investor is the return on investment he can expect on the future sale of his securities. During the negotiations, a convincing presentation of the project is essential.
Then, it is necessary to agree on the valuation of the company and the legal aspects of the operation . What is the extent of the rights that investors will benefit from in return for their contributions? Once the agreement is reached, the drafting of a letter of intent is necessary.
When negotiations lead to an agreement, the fundraising can be finalized. Legally, the transaction results in an increase in share capital through the issue of new securities . To obtain a new share or share, the investor pays the nominal amount of the security as well as an issue premium , intended to compensate for the difference between the nominal value of a security and its current value.