Companies, and especially startups and SMBs, are resorting more and more to alternative funding to finance projects or simply to expand their business. The crisis has reduced the amount of available credit in banks and tightened lending terms. As a result, options such as crowdfunding, business angels, venture capital and private equity are on the rise.
EADA associate professors Daniel Wuhl and Bárbara Muñoz –both from the strategy, business models and corporate financing areas— tackled these topics at EADA’s annual Be Finance Day. Under the title “Strategies for funding my project” the aim of their lecture was to present useful strategies and tools for companies seeking alternative funding sources to expand their projects.
New paradigm, new players
The two professors started off the session by presenting an x-ray of alternative funding platforms to banks. Daniel Wuhl pointed out that 3 billion euros in funding was extended in Europe through these platforms in 2014. Having said that, he stressed that of this 3 billion, 2.3 billion were raised in the UK and just 62 million euros in Spain. He also pointed out that venture capital in Spain managed around 3.8 billion euros in 2014 according to the Asociación de Empresas de Capital Riesgo de España. “This is capital that is there to be invested,” Mr Wuhl emphasised.
In addition to these figures, which show that these alternatives are a viable option for many companies, the speakers pointed to a new financial paradigm with different players. One of these is a movement that is known as Fintech, which groups technology companies that offer financial services alongside traditional large companies. According to Wulf, “these are companies that are taking the place of large financing bodies that have managed to transform themselves sufficiently and address the new needs of customers”.
Furthermore, there are various financing options depending on the phase the company is in. In the initial phases, Bárbara Muñoz highlighted capital injections and loans from private investors such as business angels, venture capital and share loans, in addition to public institutions and online crowdfunding platforms – where natural or legal persons can help or invest in projects through donations, incentives, capital shares and loans. On the other hand, for companies that are already operating, Barbara recommended another type of loans or capital contributions from the private or public sector such as venture lending and private equity. “These are alternatives that are more focused on growth, consolidation, expansion and internationalisation of the business,” she explained, “which means that they require larger sums and demand less risk.”
Company funding: basic advice
Both EADA professors recommended companies seeking funding to undertake a self-diagnosis to identify the phase of their business project. “It is absolutely essential to define who we are, what phase our project is in and what type of financing it will need, where we want to get to and where we are starting from, because that’s the first thing that public institutions and investors want to know,” Daniel explained. Amon other important issues he identified were planning the process for procuring finance (a more or less qualified investor), calculating the time needed to analyse and draw up the different funding options (applications, paperwork, etc.), determine the people needed to raise the funding (consider the option of outsourcing this) and identifying the steps you may need to take in the event that the business project fails (do we give up the project or seek foreign investment?).
As regards the financial aspects of a new project, the speakers insisted on the importance of analysing how much capital business owners would be willing to give up, the management of investors (what involvement should they have in the company project?), how much to increase share capital (if at all), the need for new partners and what profitability is required (depending on the phase that the company is in).