The Polish community of innovative companies is growing every year. There is a visible increase in the number of innovative companies which, from the day “0”, have plans to compete on the global market. More and more large companies and corporations set up their accelerators and CVC (Corporate Venture Capital) funds. Startups find their way into the mainstream more and more often. Even the president himself meets with them on a regular basis for image purposes. Many new funds are created, headed by Polish Development Fund (PFR). It can be said that for several years innovations in Poland and being a startup owner have become fashionable.
Each trend has an important feature – it passes over time. However, thanks to this fact, we have a chance to increase the awareness of the entire society in the subject of entrepreneurship. Owing to those enterprising people, our civilisation is constantly developing and the quality of our life is constantly improving. Educating people about creating new businesses is one of the most important investments we can make as a society. I believe that public funding programs for broadly defined startups are a great educational activity for the entire innovation industry in Poland.
Today I prepared a list of the 3 main methods of financing startups that are available both in Poland and in the world. I hope that it will be useful to people who are looking for financing for their projects. The full financing perspective required a few generalizations and simplifications. I tried to objectively compare the 3 most popular forms of project financing in Poland. Feel free to discuss this in the comments.
Innovation financing methods:
VC – Venture Capital – investment funds that specialize in investments in innovative companies at various stages of development, from the pre-seed funding round to the next numbered series of financing.
BA – Business Angels – business angels who specialize mainly in pre-seed and seed investments. They are usually experienced entrepreneurs who have sold some of their businesses and the money earned in this way is reinvested by them in new ventures.
ECF – Equity Crowdfunding – crowdfunding platforms on which individual investors buy shares (stocks) of innovative companies. By using those platforms, you can obtain financing for projects at every stage of development – from pre-seed to mature companies.
- Money for company development
Funding for any company is like fuel for a jet. Without them, most companies have no chance to start their activity, not to mention dynamic development. Without sufficient financial resources, it’s hard to be in a race where the game is about making changes quickly and delivering value to your customers. Money for the development is undoubtedly one of the most important needs of the new company.
- The rate of receiving funds
In business, time is important – the sooner we can obtain financing, the better. The possibility of financing with a bank loan in the case of new, innovative (and therefore risky) companies is limited. The alternatives are the three methods described today: equity crowdfunding (ECF), business angels (BA) and venture capital funds (VC). Negotiations with each group can take months. This type of process also generates additional costs. It also never guarantees that the fund or business angel will not change their mind after several months of negotiations or that the equity crowdfunding campaign will be successful. I know of a few examples of VC fund negotiation processes with a company that lasted over 12 months and did not bring any investments. Often just signing the term sheet, the first document about cooperation, which is the starting point for real negotiations, takes up to several months.
- First customers – the so-called early adaptors
In fact, any type of crowdfunding, not only equity one, gives the opportunity to build a community focused around a given company. They are often the first customers as well. Inviting the first clients to invest in the company is a good way of building loyalty and commitment, both among them and investors. Moreover, from the investor’s point of view, one of the best strategies is to invest in companies whose products or services will provide them added value. The golden rule of the investor: Invest in what you think has the future and provides added value to you and your surrounding.
- Investor’s business relations
The second most important benefit of finding an investor, after money, is the business relationship it can bring to the company. Investors that are linked to the company by capital, receive a certain number of shares that they can freely use/dispose. From the moment of investment, it is in the interest of each investor to further develop and increase the company’s value. Capital commitment is very often accompanied by emotional involvement/commitment. Investors who are committed both financially and emotionally are more willing to support the company and, if possible, they can help by using their business contacts. Of course, not every investor has such a desire or time for this type of involvement, but along with the simplification of communication by the management (administrators) – investors, this process is relatively undemanding for the investor.
- Marketing and PR campaign
Acquiring another round of financing is a great opportunity to attract not only investors but also new clients. Especially niche industry media are interested in new investments. Particular attention of the trade press is attracted by the investment of a well-known business angel or VC fund. When the ECF campaign is successful, such information can also reach mass media, eg. Rzeczpospolita, Gazeta Wyborcza, Newsweek, Gazeta.pl. While the business angel is not Elon Musk or Jeff Bezos, the equity crowdfunding campaign will bring more media exposure and contribute to the company’s sales growth.
- Real market valuation
I can’t imagine a more accurate valuation of the company than the public option to buy shares. The moment the company goes public or the equity crowdfunding is being carried out, the actual and most market-based valuation of the company takes place. If investors decide to buy the company’s shares at a proposed/suggested price, it means that the market values/calculates the company in that way. In the case of BA or VC investments, the valuation of the company is always negotiated, which generates additional costs. Final amounts are often not publicly disclosed so there is a risk that valuation may not always be on the principles set out by the market.
- A look at the business from a different perspective
The founders of innovative companies often emphasize that thanks to the investment process they have a better chance to look at their business from a completely different perspective. It is very important to have people around you who can help you to open your eyes to the ways of conducting business.
- A chance of getting another big round
Acquiring the first investor statistically increases the chance of acquiring another, and as a result, it is easier for us to receive another funding. If someone has previously invested in a given business, he has probably verified its validity and there is a chance that he has conducted due diligence.
- Freedom in making decisions
Decision making has key importance in any company. The younger the company is, the more often managers have to make strategic decisions in a short period of time. Most entrepreneurs who are looking for external financing sources are concerned about losing control of their own business, and that’s understandable. VC funds sometimes require clauses in their investment contracts that safeguard their interests strictly. Sometimes these are financial penalties or long-term obligations. In the case of business angels, everything is an individual matter, while it is common practice for the management board to obligate to run a company activities for a minimum of X years. By raising capital through equity crowdfunding, the company has the greatest freedom in spending raised funds.
- Regulatory risk
The vast majority of VC funds in Poland are using public funds with a leverage of 1: 5. For example 20 mln PLN comes from private investors and the rest of 80 mln PLN is a subsidy/grant from the European Union. As a result, the fund has 100 mln PLN to invest. In mid-August 2018, the world of investors and startups was informed that the rules for investing VC funds from the BridgeAlfa program were changed during the program! The change concerned the reduction of the amount of one investment from 3 mln PLN to 200 thousand EUR. These types of investment risks should be taken into consideration during choosing the type of financing for your project.
If you are looking for financing for your company, please contact me via my email: lukas@zgiep.com or read [this article] and then send your investor presentation. I will try to indicate the best possible financing methods and help to attract investors for your project.
Cheers,
LSZ