Today, many people consider fundraising to be the essential element for the success of a start-up . But bringing in external investors into the company’s capital is not an easy process.
What is fundraising? How to raise funds for a project? Which company should use it? How to successfully raise funds after the creation of the company? Explanations.
Fundraising: definition
A fundraising is an operation that allows a company to increase its share capital through the contribution of funds from investors . The counterpart of this investment lies in the granting of shares or stocks to the investor, depending on the type of target company. Fundraising in definition , consists of finding investors, in order to accelerate the growth of the company by making them new partners in the capital.
Fundraising: usefulness
Raising funds is beneficial for the company, but also for the investor. Indeed, the company thus benefits from sufficient liquidity to finance its activity . However, this often represents several million euros. It would certainly be difficult to be granted a bank loan for such sums, especially in the creation phase of the company. The only constraint for the company is having to open its capital to investors it does not know.
For his part, the investor makes an investment that is limited to a financial contribution on his part. Generally, investors do not participate in the daily life of the company. They can possibly allow it to benefit from their professional network. The investor’s goal is to make a profitable investment in the more or less long term, and for this, he is ready to take a significant risk since the success of the project is never guaranteed.
Who can raise funds?
In principle, all companies can raise funds . This therefore applies to SAS, SA or SARL. However, for the latter, the number of partners is limited to 100, which can make fundraising more difficult over time. However, in practice, it is primarily start-ups that resort to fundraising. Indeed, this type of innovative project requires significant investments, whether for equipment or recruiting talent. In short, fundraising primarily allows the financing of research and development (R&D).
A company can raise funds from its creation, in which case it is called seed capital , and/or during its life to finance its development. In which case it is called development capital . In both cases, investors, looking for the best profit, choose to invest their money in projects that offer the greatest growth potential.
How to raise funds? Investors
If you are wondering how to raise funds for a startup , you should know that there are several investor profiles. In general, they appear at different times depending on the development phase of the project.
So, we can find investors who happen to be close friends (family or friends) or followers on social networks for example. This is called love money . These investors generally have little funds, but the cumulative effect can make it possible to raise a significant sum to start the project. You can also launch a crowdfunding campaign to raise funds. Especially since crowdfunding is a good way to assess the appeal of the project to the public.
Then, we can find more experienced investors who particularly like innovative projects with high growth potential. These are business angels . They often have substantial resources and are ready to invest in projects they believe in. This type of investor intervenes in more substantial fundraisings in the seed or development phase.
Finally, among the different investor profiles, we also find venture capital companies or investment funds .
What are the effects of fundraising?
If you are wondering how to raise funds, you should know that the mechanism of raising funds has several effects.
First of all, the company increases its financing capacity since it significantly increases its equity thanks to the money provided by the new investors. This is the main objective of the maneuver. In fact, in the context of fundraising, the company does not go into debt . It does not have to repay the amount granted to investors, unlike a bank loan. However, it must open its share capital to third parties .
Indeed, the counterpart of the funds provided is the issue of new corporate securities that go to each of the investors. From then on, the power of the founding partners is diluted . Their weight in decision-making is diminished since more and more people participate in the capital. It should not be forgotten that with corporate securities (shares or stocks), investors receive voting rights . This can create conflicts, especially if investors are focused on profitability, where the founding members may have a completely different vision.