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A start-up has to intensively consider capital procurement and financing before, during and after the foundation of the company. The possibilities, many and varied, require a high degree of attention. Too little or too much capital, at the wrong time, used in the wrong manner or on poor terms, can mean a quick shutdown for a company – it is worth it to examine the options thoroughly. Depending on the business phase and scope of the project, there are different forms of financing that will be more or less sensible and promising.
What is central is the distinction between equity and debt. Equity capital is provided by the company owners. These resources are generally permanent and are paid back only if the company is sold or liquidated. Equity investors receive stocks or company shares, which are transferable. The shareholders are partners in the company and thus participate in the profit distribution. By contrast, lenders do not participate in the company's economic success. Debt capital typically exists in the form of a credit or loan. It is temporary and repayable and guarantees non-performance-related interest. There are also hybrid forms of equity and debt capital. Convertible loans or “mezzanine capital” comes into the company in the form of debt. If the company is successful, the debt can be converted into equity.
Start-ups are predominantly financed with equity capital, which is based on personal trust, commitment and promising prospects. Start-ups must bring good arguments to convince their investors and build up the trust: financial success and value will only be built up later.
Regardless of whether it is ultimately about equity or debt, it is important to know which financing is most appropriate in which phase of the start-up. As an orientation guide, you will find below the most common forms of financing along with references to the usual time phases of the investment.
4F: Founder, Family, Friends, Fools
The easiest way is to access your own money. Founders underline their commitment and willingness to set up a start-up if they themselves invest and take on risk. Care must be taken with family, friends and fools (or, rather, the somewhat naive ones). Although fundraising is quick and easy in these cases, the prospect of loss often puts a strain on personal relationships. 4F financing begins in the business plan/prototype phase. It is based on trust and on faith in a successful business model.
“Crowdfunding” makes projects and business start-ups possible by securing the support of many capital providers and supporters. A distinction is made between crowd supporting (consideration in the form of a product or service), crowd investing (in return for participation in the company), crowd lending (for interest) and crowd donating (donations without consideration). Crowdfunding is enjoying growing popularity. Crowdfunding is best suited for launching a finished product or a service. Crowdfunding has a lot to do with good communication; there should be at least a prototype or an exciting, viable idea.
Banks are specialists in credit and capital procurement. One of their key tasks is to issue commercial and current account credits. Banks provide start-ups with set-up accounts and business accounts and make their expertise available. Instruments for start-up/SME financing include guarantees available through federally recognized guarantee cooperatives, special financing and microcredits. Banks provide financing mainly during the growth phase when the company has business transactions, turnovers and securities.
For larger investments, financing provided by Business Angels can be the right way to go. Business Angels are private individuals who supply start-ups with liquidity in the form of equity, applying their know-how and their personal network. This is why Angel investments are also called “smart money”. Business Angels invest in the seed and start-up phase. They thus, at an early stage, secure their share of the start-up that has a highly scalable, innovative business model.
The term “venture capital” (VC) is equated in practice with risk capital. VC companies invest large amounts from their venture funds in the form of equity. Their objective is to achieve a high level of return after selling their shares. It is called “corporate venture” when established companies invest in start-ups. The sponsors’ aim is to participate in pioneering innovations and developments at an early stage. “Private equity” is the term used for equity investments that are not traded on a stock exchange. Private equity or equity investment companies invest in established companies. VC is typical for the second stage and growth phase. Only the best, most promising ideas come into play. Rapid growth and value enhancement are the goals.
Foundations and prizes
Various foundations and competitions that award prizes support innovative, forward-looking start-ups. The offers differ depending on the industry, company phase or region. The characteristics of this form of support are very versatile.
Promising research and development projects have the possibility of receiving financial support. The Swiss federal government and some cantons also have research funds available for start-ups and SMEs. The funds often go to a research partner, i.e. to universities or research facilities involved in the project. The Horizon 2020 program offers opportunities for European research funding. Access to research funds is possible in all company phases. The decisive factor is the quality of the project. More on the Horizon 2020 opportunities read here.
More information on the forms of financing can be found on the following fact sheet. In addition, PARK INNOVAARE conducts regular info-events on funding. To register for the next event please contact us at firstname.lastname@example.org.
Florian Gautschi, Projektleiter Bereich Start-up, Aargau Services Standortförderung