- October 26, 2018
- Posted by: Editorial
- Category: Funding
Funding your new French company
If you’re a business creator, you might have to test out your product before launching it on the market. The problem is that doing so can use up a lot of resources, without actually generating any revenue. As such, funding this phase can be difficult. How do you deal with this? By making use of venture capital.
- What is venture capital?
- Who can have access to it?
- How much is invested?
- How exactly does it work?
- Are there any risks?
- Who are the investors?
- How to choose the right investors?
What is venture capital?
Venture capital refers to the money that investors invest in an unlisted company. Here, the goal of the investor is to have shares in an innovative company that has a high potential for growth. That way, they will be able to get a significant return when they sell their shares if the company experiences this growth.
Who can have access to it?
When a company innovates, it will need to have funds in order to do some research or to create prototypes of their product. This is referred to as funding the initiation phase.
There are a few cases in which venture capital may be used:
- The idea is a complete innovation. It will then be required to create a new company who can run some tests and supply this product to the market. Generally, the amount of money necessary to pay for workers and assets will be very high, especially if the testing phase lasts a very long time.
- The new idea only starts emerging when the company’s activity has already started. Here, again, funding is necessary in order to develop the new project.
- The new idea or product has already been developed. In this case, it is the launch of the product that requires funding (for example for communication, marketing, etc. )
Investing in the company when it is only in the initiation phase is always risky. After all, if the company doesn’t manage to penetrate the market, or to create its own, the funds invested will be completely lost.
How much is invested?
It can be anywhere from a couple tens of thousands of euros to several million. Of course, this amount depends on the needs of the company, but truth is, the most important factor is how much return on investment the investors expect.
How exactly does it work?
The entry of the capital
Investors decide to contribute to the equity of the company once they’ve heard the business plan, have had a rapid overview of the company, of its product, of the target customers, and of its objectives in terms of growth. Don’t try to rush things! Investors can sometimes take months to study a project.
The way investors contribute can also vary quite a bit. Depending on the situation, they can:
- Buy regular shares
- Buy shares with “preferred dividends” or “shares with warrants attached”
- Directly open a current account
The development of the company
Generally, venture capital stays part of the equity of the company for 3 to 7 years. Basically, they stay until the company establishes itself durably on the market.
The exit of the capital
The main remuneration investors will get is the return on investment they will make when selling their shares. As such, obviously, they’re going to try to wait until the share value is as high as possible. However, there are still a couple different ways venture capital can leave a company:
- The depreciation of capital
- The company buying back the shares at a pre-defined price
- Selling the shares to another company (merger- absorption)
- The listing of the company
Are there any risks?
For investors, the risks are somewhat obvious:
- If the company doesn’t grow enough, they might never be able to find someone willing to buy their shares
- If the company disappears, they’ll have lost everything they invested
However, you should be careful as well! Venture capital can be a bit different from other sources of funding:
- The profiles of the investors and the way they make valuations are very different from bankers’
- Since investors become shareholders, they end up having the right to vote in general assemblies
On the other hand, these investors can also bring along certain contacts, or help make decisions. This can end up being a precious help for your company.
Who are the investors?
Venture capital is put in place by companies who are licensed by the Autorité des marchés financiers (financial market authorities). These manage investment vehicles called “funds”.
These funds can take many shapes: SCR (Venture Capital Companies), FCPR (High-Risk Investment Mutual funds), FCPI (Innovation Investment Mutual Funds), FIP (proximity Mutual Funds)… These are legally obliged to make a certain amount of investments a year.
To account for different companies’ needs for equity, there are quite a few different structures:
- National funds (public or private): They can be either specialized in a certain field or have very broad activities.
- Regional funds: you can contact them by going through regional participation institutes
- Corporate ventures: these are the funds created by powerful corporations. In most cases, these are specialized in the activity of the company that created them.
These generally only deal with projects in the initiation phase, but they sometimes deal with projects in development when the required equity is superior to 300 000 €.
These investments allow these industry groups to become very knowledgeable in their field, and to know of every technological progress. As such, their expertise may prove invaluable to you when developing your project.
- “Business angels”: They are individuals who come from the business world, and who are willing to invest more than 15 000€ in an innovative project. They are federated by the organization France Angels.
- Micro Venture-capital: these are the somewhat little investment groups, who only invest 1 500€ to 3 000€ in a project.
How to choose the right investors?
It depends on a lot of different factors:
- Are you in the Initiation phase? The creation phase? The development phase?
- Are you going to contact a fund willing to invest twenty thousand euros? 2 million euros?
- What activity does your company have? Are you going to contact a specialized fund?
- Where is your company located? Are you going to contact a fund who only operates in certain regions?