How To Finance A Start-up?

Finance A Start-up

How To Finance A Start-up?

Generally, a start-up needs to finance itself from its start-up and then as part of its development. In order to finance a start-up, there are several solutions: equity, fundraising, loans, financial aid… The main difficulty for a start-up is to convince financial partners (bankers, investors, business angels). Indeed, these projects constitute risky investments because the failure rate is exceptionally high in innovation projects.

How To Successfully Finance A Start-up?

A start-up project is risky financing for an investor because the failure rate is exceptionally high. To successfully finance a start-up, it is essential to have a solid file. This notably involves meeting the following conditions:

  1. Have a coherent project team in relation to the objectives to be achieved.
  2. Design an exciting business model with a product or service offering that meets real needs. The market study and the business plan will be analyzed.
  3. Obtain initial results that confirm the interest of the project. This may be a conclusive test of one of the products or services considered.

The Equity Contributions Of The Partners Of The Start-Up

The first source of financing corresponds to equity funds that the partners of the start-up can raise and inject into the company. This financing solution depends on the financial capabilities 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 amount of equity capital is essential so that the start-up can find other sources of financing.

Raising Seed Funds For A Start-Up: Seed Capital

The seed capital consists of raising funds to start an activity launching a service or a product. To successfully raise funds, you have to convince investors. The latter will be interested in the added value potential of the project. To do this, they will analyze the proposed concept and the team assembled around the project. A valuation is carried out beforehand.

Raising funds allows you to finance yourself with your funds. Thus, the company does not go into debt. The main disadvantage of seed capital is that the start-up still needs to have a better value when it is at the start-up stage. Raising too large an amount will significantly dilute the founding partners’ participation, which will complicate other subsequent fundraising.

Aid And Competitions To Help Start-Up Finance Itself

Many systems exist to help a start-up obtain financing. To find out about aid and other support systems, you must contact the Public Investment Bank (BPI). Next, a start-up can also participate in one or more business creation competitions. There are numerous competitions every year, and some will necessarily be appropriate for the project. Participation in such a competition may allow you to obtain a financial contribution and meet investors.

The Bank Loan To Finance A Start-up

A start-up can also take out a bank loan to finance its start-up or development. Several guarantee schemes are possible with the BPI. In order to obtain a bank loan for the start-up of a start-up, the partners must make a sufficient contribution of equity. This contribution must often represent at least 20% of the overall financing. 

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 installments quite quickly. If the activity has yet to start, this risks impacting its cash flow. In return, no new partner enters the company capital.

Subsequent Fundraising By Start-Ups: Development Capital

Once the start-up has started its activity, it can raise funds to develop. These fundraisings are called “development capital”. Unlike seed fundraising, the start-up will be much better valued here than when it started. Thus, it is possible to mobilize significant financing without losing control of the company.

Financing The Development Of A Start-Up With Self-Financing

Self-financing is a possible solution for financing the development of a start-up’s activity. On the other hand, in the start-up phase, the company still needs to generate more income. In practice, it is tough for a start-up to develop solely through self-financing. Often, its resources need to allow it to follow the planned development plan. After its launch, a start-up needs rapid growth. For this, significant resources must be mobilized.

Read Also: Digitalization Of Indian Businesses: Investments And Priorities For 2024

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