All businesses need financing: to recruit qualified people, to expand their market, to invest in R&D or in their product, etc. Finance is the key, we can agree on that. In order to remain totally or partially financially independent, it is essential to diversify your sources of funding. Some of these resources will be used to ensure financial balance, others to develop your R&D department and stand out in a market, while other resources will support the company's growth via acquisition marketing.
So what are the different types of funding available to start-ups? What are the terms and conditions, both for the backers (in terms of risk) and for the recipients (in terms of guarantee)? Above all, how can we ensure that each item of expenditure corresponds to the most appropriate funding ?
We've compiled a list of the main funding methods available to digital businesses. You'll get a clearer picture of whether one funding method is more appropriate than another. On your mark, borrow, go (and win big in your market)!
The first financing solution involves each of the partners/founders of the start-up committing part of their personal funds to the project. Although limited, this type of financing is nevertheless important, since it enables the creation of equity capital which will then reassure other investors.
There are a whole host of grants, both regional and national (see the Banque Publique d'Investissement), that will help you get started. A veritable goldmine of information. Bpifrance has listed the main grants available to start-ups here. You might also consider the innovation contests organized by the various players in the ecosystem.
Let's look briefly at the mechanisms behind this form of financing. Traditionally, when a banker lends money to a company, they negotiate an interest rate and ensure that the risk is limited. This is known as collateral, which can take the form of an asset (e.g. a warehouse) that the banker will seize in case the entrepreneur is unable to repay the loan.
The banker's risk is limited, but so are their rewards: while the banker knows exactly how much they can lose and how to protect against it, the banker also knows how much profit will be made from the transaction. In the case of Facebook, for example, the bank that lent money to Mark Zuckerberg in his early days could not possibly claim to benefit from the exponential profits that the start-up made from 2009 onwards.
Limited risk, limited gain.
As we noted in an article on the limitations of bank loans, this type of financing is not always the most suitable for start-ups. Indeed, the banker's job is to assess the risk and to protect against it.
Let's take the example of a manufacturer who wants to finance the purchase of a machine. He goes to his banker who offers him a loan with a related interest rate. This loan is backed by obvious collateral: the machine itself. If he defaults, the banker can always seize the machine – it depreciates over time, but they can still sell it.
Unlike industrial companies, digital start-ups do not have physical assets to put on the scale to reassure the bank. Whether you are a SaaS company or an Ecommerce player, if you want to finance your investments and various expenses, it is going to be difficult to offer the banker a tangible underlying asset or guarantee.
Proof of this is the fact that bank loan financing constitutes only 3.2% of start-ups' budgetary resources according to a PwC study (European Start-up Survey, 2019).
But what are the alternatives?
Another attractive solution for start-ups is to raise equity or venture capital (VC). The principle is simple: the investor takes the risk of investing in your company by making a capital injection. In return for a bilaterally agreed percentage of the company, the investor gets certain rights, known as capital dilution. The risk is higher, so are the expectations of profitability with an uncapped gain that is proportional to this growth.
So the investor expects a high return on their investment. As regards raising equity, it is expected that the financed company will become the leader in its market and achieve hyper-growth very quickly. This type of financing is by nature very risky, as the investor can lose everything they have invested. Raising equity is a very long process for the entrepreneur (several months) and not necessarily suitable for each company.
The funds raised should be used to invest in long-term projects. The return on investment (ROI) will not be immediate, or even certain. Typically, tech and product recruitment, R&D and acquisition marketing are expenditures that will take time to generate revenue. However, these investments are what will enable your company to grow exponentially – which is precisely what investors are looking for. Such expenditures are not risky, since they generate, for online businesses, guaranteed revenue, in an almost mathematical way.
When raising equity, we often see companies spending an average of 20-30% of the funds raised on acquisition marketing – when it would be more logical to invest in human resources, operations, or tech/product development. Marketing spend is essential to grow your business and your customer base in proportion to the costs involved.
In reality, raising equity is relevant to very few start-ups because of the many criteria involved, the time it takes, and the dilution it demands . In summary: many applicants, but few are chosen.
Whether or not your business has been able to raise funds, the financing mix is important. Think of that proverb about not putting all your eggs in one basket. In addition to the financing methods already mentioned, Revenue-Based Financing (RBF) enables you to free up funds immediately to finance your expenses with an immediate ROI, such as digital acquisition or the purchase of inventory. The ROI is also in the time you have available to allocate to growing your business.
RBF players, such as Silvr, understand the challenges these start-ups face. This method of financing is anchored on your data so that there is no bias. And so all types of entrepreneurs can finance themselves with RBF. This data-driven strategy is based solely on your performance, not on social background, geographical location, or even whether the entrepreneur is a woman, a man, a novice or a seasoned multientrepreneur. By way of comparison, Silvr funds more than 35% of companies (co)founded by women, compared to less than 5% for venture capital firms.
You should note that the risk still exists, of course, but via these powerful and reliable scoring algorithms, Silvr is able to determine the ROI generated by one euro invested in marketing (ROAS), for example. Like a bank that takes the machine as collateral, Silvr takes the income you will generate in the future from your current investments as the underlying basis for financing. Silvr predicts that by immediately freeing you from the cost of acquisition, the financial burden of inventory, or even by advancing recurring revenue (in the form of a subscription), your business should grow in some proportion whether you are a SaaS player, an Ecommerce operation, a DNVB or a marketplace. All of these digital entrepreneurs have the ability to acquire, and therefore retain, and by necessity experience hyper-growth.
You can now take advantage of 48-hour financing to accelerate your growth. And we do this on a recurring basis, as we refinance our clients 99% of the time. By experiencing growth that would be unattainable without this cash advance, Silvr gives you the means to grow again and continue to adapt to your market. We support you and adapt to each stage of your development.
In conclusion, we have seen that each method of financing has a timeframe and a level of risk associated with it. Far from being exclusive, the financing methods listed can be combined to increase the company's investment capacity tenfold. By choosing the most appropriate financing method for each expense, the CFO and the entrepreneur are really giving themselves the means to succeed.