Fundraising is very necessary for a wide range of start-ups, e-commerce stores and all kinds of SMBs. It is a process to obtain financing of a few thousand to a few million euros for the purpose of building and expanding a business. What do fundraising steps consist of, how to set it up and what are the limits to the fundraising process?
Fundraising: introduction
Fundraising is a solution to finance one's company by bringing investors into the company's capitalization table. The shareholders then hold a percentage of the company in exchange for financing.
It is a solution very much used by start-ups with a strong development potential and innovative business models. The investors who participate in the fundraising of this type of company bet on the future value of the enterprise: their objective is then to realize a capital gain on the later resale of their shares.
There are different types of fundraising - the mechanisms vary according to the stage of the company requesting the financing.
Seed capital fundraising is requested at the creation of the company or to launch a project. It allows financing a start-up activity, the launch of a service or a new product, or entering a new market. The announcement of a seed capital fundraising can thus be used as a real management and marketing tool by many start-ups. It aims at gathering enough liquidity to carry out a specific project, and therefore does not usually involve very large amounts.
Development capital fundraising aims at increasing the growth of the company. The amounts collected during this stage must allow the company to improve its products or services, but also to recruit teams or to launch communication campaigns. In this respect, development capital can amount to several million euros. This type of financing campaign is therefore more important than seed capital, since the applicant company already has an attractive valuation in the eyes of investors and is looking to expand further.
Why and how to launch a fundraising campaign
Fundraising allows you to considerably increase your runway by several million euros. It is a capital contribution: the amount raised does not have to be repaid. Moreover, fundraising represents a real opportunity to create a network of professionals thanks to the meeting between the management of the start-up, investors and business angels. Thus, fundraising is a way to finance your company and really reach your goals. In order to launch this operation, companies must follow three steps to raise funds:
- Prepare their financing project for each fundraising. To gain the interest of investors, it is necessary to justify the usefulness of fundraising and thus explain what financing needs the company has. It is important to thoroughly explain to investors the future use of the funds (especially if you are asking for several million euros) and therefore to justify the amount requested through a clear and attractive business plan. Normally, start-ups that ask for a funding round make a business plan in order to better structure their request and to be better understood by potential partners. It is also necessary, during the preparation stage of the fundraising project, to highlight the company's potential.
- Search, find investors and negotiate the terms of financing for each fundraising round. More than finding investors, you have to convince them to take a share in the company's capital and to accept that this share will decrease according to the time or the number of shareholders entering the company. This is a prospecting stage that requires approaching potential investors with the aim of convincing them to adhere to the project thanks to an attractive announcement. The main argument to obtain a financial investment is the potential capital gain from the future sale of the shares. It is therefore important to benefit from expert advice in order to know how to model an attractive business plan that highlights the value of the company and minimizes the risk that the investment represents for the future partners. It is often at this stage that companies turn to the services of business angels, who are experts in investment funds. Following the acceptance of one or more investors, it is important to observe the legal aspects of the fundraising: extent of the investors' rights according to their percentage of the share capital and drafting of a letter of intent.
- Legal conclusion of the fundraising. In the context of fundraising, if the negotiations lead to an agreement, the fundraising is legally translated into an increase in share capital and the issuance of new shares. This is the legal stage of the drafting of official documents, including the shareholders' agreement. The shareholders' agreement must contain a governance section that allows the company's sharing and decision-making system to be organized. At the legal level, the acquisition of a share of a company requires that an investor pays the nominal amount of the security as well as a share premium which aims at compensating the difference between the nominal value of the security he is acquiring and its current value.
The limits of fundraising
Fundraising, although a very fashionable financing vehicle for start-ups, remains a solution whose implementation can be time-consuming for companies looking for financing.
It is also a financing solution that has an inescapable drawback: investors become owners of a percentage of the company's share capital. Raising funds involves a risk, since it requires giving up part of the ownership of its structure to a plurality of individuals.
For the company benefiting from the fund-raising, this mechanism therefore presents a loss of autonomy. As for the investors who have become partners, they see their percentage of participation (and consequently their rights) decrease after the fundraising with time and the number of shareholders increasing. This situation can generate conflicts and difficulties in developing strategic orientations. Each partner or investor holding capital stock may have a different view from the others. This plurality of opinions is likely to constitute a risk factor in terms of development.
The fundraising mechanism can allow one to obtain important financing in order to finance one's company, however this solution depends on the investors' will. At times of slower economic growth, digital start-ups often report difficulties in raising sufficient funds to support their projects.
Alternatives to fundraising
To solve the needs of tech start-ups, Silvr offers an alternative to fundraising: professional loans whose acceptance is based on the revenue-based financing method. We analyze the potential future sales of companies applying for a loan; our algorithms analyze the company's metrics and automatically determine its eligibility, applying a risk score to your business.
Our financing is favored for its flexibility. Companies can adjust the amount and regularity of their monthly repayments. They only pay back on the months in which they have actually had an income. Companies can then repay a larger or smaller amount depending on the month and their monthly turnover. In addition, once their eligibility is accepted by the algorithm, they have the access to funds in less than 48 hours.
