How to Finance a Startup?
Generally, a start-up needs to finance itself from the start, and then as part of its development. In order to Finance a Startup, there are several solutions: equity, fundraising, loans, financial aid, etc.
The main difficulty for a start-up is to convince financial partners (bankers, investors, business angels). Indeed, these projects are risky investments because the failure rate is particularly high in innovation projects.
This dossier explains what are the main possible solutions to finance a start-up and what are the important criteria to convince investors
How to successfully Finance a Startup?
A start-up project is risky financing for an investor because the failure rate is particularly high. To successfully finance a start-up, it is essential to have a solid file. This implies in particular to meet the following conditions:
- Have a project team consistent with the objectives to be achieved.
- Design an interesting business model, with a product or service offer that meets real needs. The market study and the business plan will be analyzed.
- Obtain initial results which confirm the interest of the project. It can be a conclusive test on one of the products or services envisaged.
Equity contributions from start-up partners
The first source of funding corresponds to the equity that the partners of the start-up can raise and inject into society. This financing solution depends on the financial capacities of the partners. Contributions may include goods other than money. For example, it could be the contribution of a web application or a research project.
A minimum of equity contributions is essential for the start-up to find other sources of funding.
The start-up fundraising of a start-up: seed capital
The seed capital is to raise funds for starting a business, the launch of a service or product. To successfully raise funds, you have to convince investors. They will be interested in the added value potential of the project. For this, they will analyze the proposed concept and the team assembled around the project.
A fundraiser allows you to finance yourself with equity. Thus, society does not go into debt. The main drawback of seed capital is that the start-up is still poorly valued when it is at the start-up stage. Too large a fundraiser will greatly dilute the participation of the founding partners, which will complicate other subsequent fundraisers.
Aid and competitions to help Finance Start-up itself
Many mechanisms exist to help start-up finance itself. To find out about aid and other support systems, contact the Public Investment Bank (BPI).
Then, a start-up can also participate in one or more business creation contests. There are many competitions each year, and some will necessarily be appropriate for the project. Participation in such a competition can make it possible to obtain a financial contribution and/or to meet investors.
Bank Loan to Finance a Startup
A start-up can also take out a bank loan to finance its start-up or its development.
In order to obtain a bank loan for the start-up of a start-up, the partners must make a sufficient equity contribution. This contribution must often represent at least 20% of the overall funding. Otherwise, the loan request is likely to be refused. Then, guarantees will be requested by the lending institution.
The disadvantage of this financing method is that the start-up will have to repay loan maturities fairly quickly. If the activity has not started, this could impact its cash flow. In return, no new partner enters the capital of the company.
The subsequent fundraising of start-ups: development capital
Once the start-up has started its activity, it can raise funds to develop. These fundraisers are called “development capital”
Unlike raising seed funds, the start-up will be much better valued here than when it started. Thus, it is possible to mobilize significant funding without, however, losing control of society.
Financing the development of a start-up with self-financing
The self-financing is an option to fund the development of the activity of a start-up. However, in the start-up phase, the company is not yet generating enough revenue.
In practice, a start-up finds it very difficult to develop solely through self-financing. Often, its own resources do not allow it to follow the planned development plan. After its launch, a start-up needs rapid growth. For this, significant resources must be mobilized.