What is a startup?
Let’s start at the very beginning. The concept of a startup causes a lot of difficulties, as it is often used as a synonym for any new business, which is not quite true. The second difficulty is the lack of an actual definition of a startup that is binding. Let’s try to resolve this doubt.
Approach one, or business model
According to Steve Blank, a startup is a company that is characterized by a search for the right (repeatable and scalable) business model. This definition is very capacious, making it accommodate many start-ups – after all, it is not surprising to find optimal business solutions among young companies.
Approach two, or purpose and risk
Another definition, an extension of the previous one, was proposed by Eric Ries. According to him, a company can only be called a startup if its goal is to create a new product or service. Moreover, Ries points out that a peculiar feature of startups is the lack of certainty about the success of the entire venture. This definition significantly narrows down the group of startups, and is also a bit closer to what we might call the current term.
The third approach, or phasing
The author of the third definition of a startup is Dr. Agnieszka Skala – economist and member of the Program Council of the Startup Poland Foundation. According to the author of the definition, the elements that determine membership in the set of startups are the lack or uncertain demand for the company’s products (resulting directly from their innovation) and limited resources. Dr. Skala then proposes an approach he calls the spiral definition of a startup – a division into successive subsets of startups, narrowing them down gradually, as well as determining the desired direction of development. These include an innovative business model, building and implementing new technologies, creating a product, launching an innovation, achieving exponential growth in customers, revenue, and finally company value. Few startups reach the final stage of the spiral.
We already know what startups are. It’s time to find out how we can get financing for them.
Ways to fund startups?
Since one of the goals of a startup is to bring innovations to market, this usually requires considerable financial resources, which the originators often do not have. Hence, they are most often assisted by investors. However, this is not the only way. I will now briefly discuss all the most popular sources of funding for startups.
Equity
Some startups use equity – savings or money borrowed from immediate family members (not subject to gift tax). This type of financing is referred to in startup nomenclature as bootstrapping. The use of bootstrapping is often only possible in the early stages of a startup’s development. Over time, innovative projects absorb more and more resources, which requires raising external capital.
PARP grants
The Polish Agency for Enterprise Development is a state-owned body tasked with supporting the development of companies in the SME sector. PARP has both state and EU funds – it allocates them for the organization of training courses, but also for grants that can benefit startups, among others.
Financial investors
These are institutions with resources, willing to invest in promising startups. Depending on the stage at which they usually support companies, we divide financial investors into business angels, Venture Capital funds and Private Equity funds.
Business Angels
The first type of investor is an entrepreneur who has successfully created one or more successful businesses. He decides to use his experience to help the new company grow and gain his own benefits. Business angels have the knowledge, resources and familiarity in the business world, so they are able to significantly influence the development of a start-up in exchange for shares.
VC funds
VC, or Venture Capital, is a type of investment undertaken by funds prepared for such activities. Their goal is to acquire startup shares and sell them later (at a high profit). To achieve this goal, Venture Capital funds subsidize promising companies that are already in the market, but in the early stages of development, in exchange for shares or stocks (if they are already listed). VC funds’ involvement usually lasts from three to seven years, at the end of which they resell the shares they acquired at the beginning of their cooperation with the startup, thus making a profit (or recording a loss).
Private Equity Funds
The operation of private equity funds is similar to those previously discussed, but as a rule, private equity funds invest in unlisted companies. Some private equity funds happen to bend this rule, but then they make an effort to have the company they support delisted from the stock market.
PE funds invest in companies at later stages than the previously described investors.
Bank loans
Many banks offer startups a startup loan, but still many startups can’t get a loan due to financial conditions. In addition to these, lenders require a business plan (on the basis of which they assess the company’s potential) and a certificate of no arrears with Social Security and the Internal Revenue Service. It will also be necessary to provide the company’s data (Tax ID and REGON number).
Factoring for startups
Since startups can seek financing from bank loans, this means they might as well use factoring. The conditions for obtaining factoring are more lenient than for loans – there is usually no need to be in business for a certain period of time, and it is enough to issue at least one invoice with a long payment term. Factoring is a slightly different type of financing, but it is worth considering this option when a startup waits a long time to pay invoices from counterparties and when other forms of financing do not suit it for various reasons.
