Family, friends, naive enthusiasts. It is not enough to start a business
Jakub Prokop - 24-09-2018
The capital of start-ups is made up primarily from the ideas and commitment of the founders. The financial capital is taken from people, funds and institutions willing to invest their resources. How to choose the source and form of support?
The most obvious source of funds for setting up a start-up is one's own savings, a conventional loan and the so-called FFF (family, friends, fools – “naive enthusiasts”). The entire category of these “primary” sources is called bootstrapping and, contrary to appearances or imaginations, is an important part of the start-up capital, both in Poland and in the world.
68% per cent of the analysed start-ups are funded from one's own savings - according to the report “Polskie Startupy 2017”. The myth of “young companies operate and grow for other people's money” is a generalisation.
The truth is more complicated, because a lot depends on the phase of start-up's development. From the mentioned analysis, it also follows that 20 percent of young companies use a foreign source of financing (accelerator, business angel or venture capital fund), and - surprisingly! - as much as 77 percent of start-ups declare their willingness to acquire an external source of financing in half a year.
A special method of financing, independent of the development phase, is crowdfunding, i.e. raising small payments from the community in exchange for a promise of product delivery or participation in future profits of the company. The most popular platforms include Kickstarter, GoFundMe and Indiegogo, and in Poland also Wspieram.to, PolakPotrafi and Wspolnicy.pl. The drawback of such solution is that it requires... popularity; efficient marketing is necessary, and an interesting and originally “sold” project has to be followed by a large number of supporters
A seed in the incubator
At the beginning, in the seed stage of business development, obtaining money from external sources is usually not easy. Other options emerge only after reaching the milestones - with particular emphasis on the so-called minimum viable product (prototype with minimum functionality).
- I think that relying solely on your own capital from the very beginning is not possible - says Patrycjusz Marcinkowski, founder of the Tosend start-up, awarded in last year's Start-Up Challenge competition at the Katowice European Start-up Days. - Poland should not only incubate innovative ideas, but also ensure that they are fully Polish.
Young companies in the early phases of development receive help from, among other things, accelerators and incubators. They often provide financial support, as well as access to a network of contacts, technical assistance and promotion - often for participation in business.
Accelerators and incubators are managed by, among others, PZU, OVH, Orlen, Enea, PGNiG, Poczta Polska. The corporation, by launching the incubator, often hopes that the start-up will become a solution to one of its problems and will get involved with it for longer. The group of incubators also includes Academic Enterprise Incubators that “lend” its legal personality in exchange for regular contributions (which may be profitable for fledgling companies).
The Polish Agency for Enterprise Development operates slightly differently. It transfers funds for selected, innovative projects in programs such as Inteligentny Rozwoj (Intelligent Development), Polska Wschodnia (Eastern Poland) and Wiedza Edukacja Rozwój (Knowledge Education Development) - including innovation vouchers for SMEs, Poland Prize, ScaleUp, Model for competition or the SME Management Academy.
As for funds addressed directly from Brussels, start-ups should be interested in the EU programs JEREMIE and Horizon 2020. The first (Joint European Resources for Micro Enterprises) allows to take low-interest loans with a small input from one’s own resources; the second - to get a subsidy if the idea concerns innovative scientific research, implementation of new solutions, products or technologies.
Funds from funds
Venture capital funds (VCs) - investing in start-ups - accept the high risk associated with the uncertain future of the company, but in return expect a high rate of return from investment. By agreeing to the fund's investment, the start-up gains an experienced shareholder who has the right to vote in the decision-making processes. Mentoring is also often involved.
In addition to the funds, there are also funds-of-funds, including PFR Ventures - managed by the Polish Development Fund (a similar project in the EU is the VentureEU established by the European Commission and the European Investment Fund).
PFR Ventures - the second-largest fund-of-funds (after the British one) in Europe - creates a “funding relay”. PFR Starter FIZ invests in companies in the initial phase of development with an idea and without customers; PFR Biznest FIZ is directed to a similar group, but works in cooperation with business angels (financing + mentoring); PFR KOFFI FIZ deals with well-established companies.
NCBR CVC also supports start-ups - through the PFR fund (for larger investments, used to transfer technology to businesses). The Polish-Israeli fund TDJ Pitango Ventures was created within BRIdge VC NCBR. In both cases, the goal when supporting start-ups by the state is to attract capital and sometimes private mentoring.
In the expansion and stabilization phase, the possibility of raising capital from banks and private equity (PE) funds is significantly increasing. In the strict sense, the VCs are part of the PEs, but the latter name is accepted when it comes to investments in developing companies.
Not only floor
Another form of assistance for start-ups are the so-called business angels - a phenomenon that is not too popular in Poland. Experienced entrepreneurs become mentors to the younger generation, offering all kinds of support. Their motivation is frequently not strictly financial (investments) and they act out of the willingness to share knowledge.
In addition to all funds, there is also the possibility of taking over the company and transforming it into a corporate division. It is difficult to predict the advantages and disadvantages of such a solution - the conditions are set individually. Projects can maintain large autonomy, as Waymo or Glass that belong to Alphabet X, but they can also be fitted into corporate schemes, as sometimes happens with companies bought by banks.
If a business already operates and meets the conditions set by the Polish Financial Supervision Authority, it may sell its shares on the stock exchange. In July of this year, EC regulations will come into force, and will enable companies to obtain financing of up to EUR 8 million on the stock exchange without drawing up a prospectus. Recently Brand24, originating from the start-up environment, made its debut on the Warsaw Stock Exchange (NewConnect).
In general: a stream of money facilitates development of start-ups, but it is worth remembering that sudden access to financing, especially from the state or EU, is often associated with spontaneous “burning” of funds without a clearly defined goal and minimal discipline.
- The fact of having too much money at the beginning of the road may bring a peace of mind and loss of self-preservation instinct, because this “liquidity cushion” creates, sometimes excessive, comfort of work and kills motivation - says Maciej Balsewicz, president of the bValue.vc fund.
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