Fundraising is a technique used to raise funds necessary for the launch or development businesses, as well as for their operation. The opening of their capital to investors is a solution for their search for financing. The realization of a fundraising meets several challenges: the need for money for companies and the desire of investors to make a profitable investment.Fundraising is a very common method of financing in the world of start-ups. The operation consists of bringing investors into the capital of the company, in exchange for the contribution of the funds it needs to achieve its objectives: the investor pays a sum of money, the start-up sells him shares of the society. As a general rule, these equity securities are sold for a limited period, as the investor does not intend to remain in the company over the long term. The whole purpose of his participation is to realize a capital gain in the short or medium term: the investor bets on the potential of the start-up to quickly earn money, on the resale of his shares. This is why the exit conditions of the
Who can fundraise?
Fundraising mainly occurs when a start-up is launched, but it can also concern any type of business throughout its life cycle.Fundraising is therefore an operation open to all companies, but in practice, it is start-ups that attract investors, because these innovative companies have strong growth potential. The entrepreneur must bear in mind the investor’s objective: to make a capital gain on the resale of his securities. However, it is the strong growth in activity that conditions the valuation of securities on the rise.Fundraising often takes place at the start of the activity during the launch of the company’s first product or service: this is referred to as seed capital. But the operation can also be carried out later, to accelerate the development of the start-up
How to raise funds?
Achieving successful fundraising therefore requires following a rigorous and well-studied procedure. The different steps listed above help to understand how to proceed with this operation.
1 – Establish fundraising objectives
Fundraising must be considered as the solution to a real and justified financing need. The start-up has set concrete development objectives, and its equity is not sufficient to achieve them in the expected time frame. Examples:”Buy the vacation home of your dreams, together”: this is the proposal of the founders of Prello, an innovative platform created in 2021. To accelerate the development of their activity in a competitive context, the founders are raising 13 million euros from February 2022, in particular with a venture capital fund. The objectives are clear: recruit a hundred employees and expand the catalog of second homes for sale, in a short time.
Founded in 2020, the start-up JOIN markets software for e-commerce companies that allows them to create stories and automatically publish them on their websites. In 2022, the founders raise funds of 4.5 million euros from several investors. The need is justified given the growth of the “story” format in new digital uses, and the amount is proportionate to the objective: to strengthen the tech, product, sales and marketing teams.The Shares social trading application was created in 2021. At the time, the start-up’s equity only allowed it to develop the application with limited access. Less than a year later, the founders, strong on the premises of their success, raised 40 million dollars to finance the expenses necessary to launch the application on a large scale in the United Kingdom: expenses in human resources and in marketing.
2 – Prepare the business plan
Once the objectives of the fundraising have been set, the managers of the company must prepare the financing operation by designing a solid and attractive project, making it possible to enhance the start-up in the eyes of investors and to justify the use that will be makes funds provided. This work is greatly facilitated by the design of a business plan.This document is intended to answer the various questions of investors:
3 – Identify potential investors
The start-up finds and contacts investors likely to be interested in the operation. Traditionally, these are investment funds. The start-up can also approach business angels: the business angel is an individual ready to invest personal funds in the company.
4 – Pitching the fundraiser
The start-up sent its business plan to identified investors, and obtained positive feedback. Therefore, a meeting is organized: it is on this occasion that the business creator makes his pitch deck , to finish convincing the investor to make an equity investment. The founder of the start-up must be convincing about the business project and the development potential. This oral presentation is decisive for the investor’s decision.
The pitch deck lasts only a few minutes and is therefore not intended to be exhaustive. The author of the presentation, however, must be able to respond to any request for additional information, hence the importance of refining his operational summary, in particular on the potential aspects of the market, technical feasibility and commercial projections. The founder of the start-up makes sure to have the figures in mind, and prepares to answer technical questions that do not necessarily fall within his competence.
5 – Negotiate the letter of intent
This delicate step consists in contractualizing the conditions for the investor’s participation: the parties agree on the valuation of the start-up, on the securities granted and on the terms of the subsequent exit of the investor.
6 – Conclude the fundraiser
The parties sign the letter of intent relating to the financial and legal conditions of fundraising. An extraordinary general meeting records the capital increase, and the new securities to be distributed to investors are issued.