A start-up is a company that stands out from other companies because of its generally innovative activity and its diversity within the shareholding.
On the one hand, the shareholders consist of founders who have taken the initiative to develop their idea or project. The founders’ know-how is the cornerstone for the further growth of the start-up. On the other hand, there are external investors (so-called business angels or venture capital investors) who make a financial investment and share their professional experience.
Given the inherent high-risk nature of start-ups, success is not guaranteed. For this reason, start-ups often need to seek funding outside the traditional financing methods (such as bank loans).
Financing is extremely important to enable research and development.
Each financing method has its own specific considerations. The founder typically aim to minimize their financial exposure, where as investors naturally seek substantial compensation for the risks they undertake – aligning with the “high risk, high reward” principle.
There are four financing methods where start-ups often rely on:
1. Contribution to the start-up’s equity
First, start-ups are often financed by cash contributions into the start-up’s equity. These are the so-called venture capital investments. These are equity investments made for the launch, early development or expansion of a company. Venture capital is long-term risk capital for unlisted companies; it is a financing method for start-ups that show promising rapid growth. Small companies typically turn to venture capital when their own funds are exhausted and banks are unwilling to finance because they deem to lack adequate volume. Moreover, there are also government funds that regularly make these kinds of investments such as Federale Participatie- en Investeringsmaatschappij (“FPIM”), Participatiemaatschappij Vlaanderen (“PMV”), the Limburgse Investeringsmaatschappij (“LRM”) etc. The focus in doing so is often sector-oriented.
Since financial institutions are often reluctant to finance start-ups, partly due to the high risk profile or a lack of currently valuable or marketable assets on which a security could be placed, the authorities in our country (both regional and federal) have tried to meet this problem by granting subsidies. However, obtaining subsidies cannot be taken for granted. After all, the government offering subsidies will impose conditions which have to be met at all times. If such conditions are not met, there is a risk that the government will withdraw the subsidy.
3. Convertible loan
The convertible loan is a financial instrument primarily aimed at start-ups which have limited short-term repayment capacity and whose business plan provides for subsequent fundraising. By concluding a convertible loan, the start-up finances itself through a special form of debt that postpones the discussion on the valuation of the company’s shares. After all, it is at the time of conversion (i.e. converting the loan into capital in exchange for shares) that such discussion on valuation takes place.
Bootstrapping concerns a financing method in which the founder seeks to establish and build his/her start-up with his/her personal financial resources which the founder has received from the business revenue that the start-up has generated. This entails the disadvantage that the organic growth of the start-up is impeded and the start-up is even more vulnerable to setbacks.