Fundraising : a growth accelerator for SMEs

The financing of growth is at the heart of the concerns of entrepreneurship. Designing a business model, developing a service offer or a product with high potential is not enough. Moreover, market opportunities are sometimes ephemeral. You have to move quickly or risk losing your leadership in the face of competition. And if you are an innovative start-up, you also need to quickly gain a dominant position in your market so that you don’t have to overcome «barriers to entry».

The search for financing is no longer synonymous with a meeting with the banks.

Recourse to bank credit is not always an effective solution. This is because banks find it difficult to finance a budding business and tend to lend to those who are in an annuity situation. The disintermediation of financing channels, which appeared as early as the 1980s, was already an alternative to debt saving as a substitute for market finance. However, this short money circuit only benefited companies that had already reached critical size. But since the beginning of the 1990s, new practices in disintermediated financing have brought the prospect of raising funds within the reach of any SME, and not only those from the «tech» sector. There are now alternatives to bank financing for high-growth companies. However, before trying to attract investors, candidates for private equity must be able to explain why they are seeking to raise funds.

What are the possible motivations for raising funds?

Fund raising cannot be improvised. Its planning is part of a company’s overall strategy to conquer its market. And its success depends on a reflection that must be carried out beforehand to know what the motivations are and what will be the right timing to initiate it.

Why resort to fundraising?

Entrepreneurs with business projects, whether it is a creation, external growth or the launch of a new activity, build their development plan on the basis of future revenues. However, they know that this structuring phase requires expenses that will not be immediately covered by revenues. If there are no other alternatives for financing these investments than to make equity contributions, they may not have the means to do so. The first alternative, which consists in lowering the ambitions of the initial project, has the disadvantage of weakening it or even rendering it inoperative if competitors take it over. Soliciting investors and organizing a fund-raising campaign will avoid this pitfall. The approach will consist in opening up the company’s capital to new partners who will act as «Sleeping Partners», but who will have to be convinced.

How do you go about finding investors?

Define your needs:

A search for financing requires a preliminary work which consists in identifying its needs. It is necessary to define as precisely as possible the total amount of the envelope that will be solicited. It must be sufficiently sized in relation to the return on investment expected from your project. But it is also necessary to take care to limit oneself to one’s real needs so as not to leave too much room for new partners and to maintain control of one’s business.

Know who you are going to contact:

Here again, it is essential to analyze your objectives. Starting a business «ex nihilo», buying out a competitor or accelerating the development of your company by investing in a new project cannot be financed by always talking to the same people.

When to raise funds: the right timing

The answer could be, of course, when the need arises. The reality is a little different. The decision to raise funds must necessarily be correlated to the existence of a business project. However, the right moment to act also depends on parameters exogenous to the company’s eco-system. The dynamism of venture capital varies according to the business climate. Depending on the economic environment, certain periods may be more favourable than others for seeking capital and raising funds on better terms. Since the steps to be taken with investors are very time-consuming, it will be wise to carefully assess the chances of success. On the other hand, if the period is favourable, but the project you wish to finance is not yet mature, you may as well anticipate it and immediately start looking for «new money».

At the origin of numerous successful fundraising stories

Using private equity has proven to be a successful strategy for many SMEs, some of which have sometimes been able to take advantage of the leverage effect of a fund raising to change size and join the corpus of ETIs. In 2019, French start-ups raised a record total of more than EUR 5 billion, up 39% compared to 2018 (source: La Tribune of 15/01/2020). And the average ticket from these rounds of financing amounted to 6.8 million euros. This result confirms an upward trend in venture capital operations since 2015.

Some notable examples of successful fund raising illustrate the contribution of private equity to the success of companies. Over the last five years, we have seen some resounding deals such as Parrot (€300 million in 2015), BlaBlacar (€200 million in 2015), Showroomprivate (€70 million in 2015) and Deezer (€100 million in 2016).

The financing of growth is at the heart of the concerns of entrepreneurship. Designing a business model, developing a service offer or a product with high potential is not enough. Moreover, market opportunities are sometimes ephemeral. You have to move quickly or risk losing your leadership in the face of competition. And if you are an innovative start-up, you also need to quickly gain a dominant position in your market so that you don’t have to overcome «barriers to entry».

The search for financing is no longer synonymous with a meeting with the banks.

Recourse to bank credit is not always an effective solution. This is because banks find it difficult to finance a budding business and tend to lend to those who are in an annuity situation. The disintermediation of financing channels, which appeared as early as the 1980s, was already an alternative to debt saving as a substitute for market finance. However, this short money circuit only benefited companies that had already reached critical size. But since the beginning of the 1990s, new practices in disintermediated financing have brought the prospect of raising funds within the reach of any SME, and not only those from the «tech» sector. There are now alternatives to bank financing for high-growth companies. However, before trying to attract investors, candidates for private equity must be able to explain why they are seeking to raise funds.

What are the possible motivations for raising funds ?

Fund raising cannot be improvised. Its planning is part of a company’s overall strategy to conquer its market. And its success depends on a reflection that must be carried out beforehand to know what the motivations are and what will be the right timing to initiate it.

Why resort to fundraising?

Entrepreneurs with business projects, whether it is a creation, external growth or the launch of a new activity, build their development plan on the basis of future revenues. However, they know that this structuring phase requires expenses that will not be immediately covered by revenues. If there are no other alternatives for financing these investments than to make equity contributions, they may not have the means to do so. The first alternative, which consists in lowering the ambitions of the initial project, has the disadvantage of weakening it or even rendering it inoperative if competitors take it over. Soliciting investors and organizing a fund-raising campaign will avoid this pitfall. The approach will consist in opening up the company’s capital to new partners who will act as «Sleeping Partners», but who will have to be convinced.

How do you go about finding investors ?

Define your needs :

A search for financing requires a preliminary work which consists in identifying its needs. It is necessary to define as precisely as possible the total amount of the envelope that will be solicited. It must be sufficiently sized in relation to the return on investment expected from your project. But it is also necessary to take care to limit oneself to one’s real needs so as not to leave too much room for new partners and to maintain control of one’s business.

Know who you are going to contact :

Here again, it is essential to analyze your objectives. Starting a business «ex nihilo», buying out a competitor or accelerating the development of your company by investing in a new project cannot be financed by always talking to the same people.

When to raise funds : the right timing

The answer could be, of course, when the need arises. The reality is a little different. The decision to raise funds must necessarily be correlated to the existence of a business project. However, the right moment to act also depends on parameters exogenous to the company’s eco-system. The dynamism of venture capital varies according to the business climate. Depending on the economic environment, certain periods may be more favourable than others for seeking capital and raising funds on better terms. Since the steps to be taken with investors are very time-consuming, it will be wise to carefully assess the chances of success. On the other hand, if the period is favourable, but the project you wish to finance is not yet mature, you may as well anticipate it and immediately start looking for «new money».

At the origin of numerous successful fundraising stories

Using private equity has proven to be a successful strategy for many SMEs, some of which have sometimes been able to take advantage of the leverage effect of a fund raising to change size and join the corpus of ETIs. In 2019, French start-ups raised a record total of more than EUR 5 billion, up 39% compared to 2018 (source: La Tribune of 15/01/2020). And the average ticket from these rounds of financing amounted to 6.8 million euros. This result confirms an upward trend in venture capital operations since 2015.

Some notable examples of successful fund raising illustrate the contribution of private equity to the success of companies. Over the last five years, we have seen some resounding deals such as Parrot (€300 million in 2015), BlaBlacar (€200 million in 2015), Showroomprivate (€70 million in 2015) and Deezer (€100 million in 2016).

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Ibrahima Sissoko

Ibrahima Sissoko

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Plus haut plus loin Plus fort plus vite Accélérateur de croissance sont les mots qui définissent l’esprit Growth Ground