Finance Startups

To a certain extent, a builder also manages capital on behalf of its own shareholders or investors. Financing startups is therefore one of its key activities.

Document Contributions and Accounting Treatment

When a venture builder contributes cash, software development, equipment, staff time, or other services to a startup, both entities should document what was supplied, on what terms, and who owns the resulting intellectual property.

Documentation does not determine the accounting treatment by itself. An invoice from the builder may record a transaction between two legal entities, but it does not automatically make the expenditure an asset, increase the startup’s valuation, or improve its ability to raise funds. Under IAS 38, development expenditure is recognized as an intangible asset only when the applicable recognition criteria are met. Other expenditure is recognized as an expense.

The correct treatment depends on the accounting framework, the contract, the nature of the work, and evidence such as time records and directly attributable costs. Related-party pricing, tax, company-law, and intellectual-property questions may also apply. A qualified accountant and lawyer should review the arrangement before entries or invoices are issued.

Read the IFRS overview of IAS 38 Intangible Assets

Investment Methodology

Single-payment Investment

The most straightforward and widespread form of investment is a single, lump-sum disbursement, often coinciding with a company’s inception. This approach’s primary advantage lies in its simplicity: it’s easy to understand, thus reducing confusion for entrepreneurs, and minimizes management and administrative efforts, thereby cutting costs. Moreover, a one-time investment signifies a clear milestone, marking the entrepreneur’s official endorsement by the investor and validating them as a management-supported entrepreneur.

However, this method’s downside is that it limits the investor’s flexibility and foregoes chances to reassess the team’s or business’s suitability.

Fractioned-payment Investment

An alternative to the single payment model is distributing capital injections over time, tied to predefined growth milestones.

The fractional investment methodology’s main advantage is the reduced financial risk for the investor. It ensures closer supervision of the team, clearer expectations, and more frequent assessments of the team or idea’s viability. Additionally, it allows the investor to control the amount invested during the incubation process, enabling incremental funding.

The drawback of this method is that it complicates the builder-investor relationship, which in some cases can weaken the builder’s recruiting ability. It also demands more management and administrative oversight.

Comparison: Single vs. Fractional Payment

In the table below, we compare both investment methodologies in a scenario where the investor contributes $50,000.

TABLE 2-6
Comparison of single vs. fractional payment investment methodology
	One-time Payment	Split Payment
Incubation		$5,000
Constitution	$50,000	$20,000
Maturation milestone		$25,000
Total invested	$50,000	$50,000

Both methodologies have their pros and cons, including variations within the fractional payment model. However, the fractional investment method is generally more suitable due to its lower risk. Conversely, the upfront capital injection method deserves consideration for establishing trust and providing spending capacity during the incubation period.

Additional Sources of Financing for Startups

In the context of venture building, one key management task is to secure additional external financing sources to support startups, beyond the venture builder’s own funds. These external sources of financing not only complement but also enhance the investment made by the venture builder.

Key External Financing Sources

Institutional Grants

Various types of grants are available, often adding financial resources proportional to those contributed by business promoters. This can significantly boost a startup’s funding, at times doubling or tripling the initial capital injection. Additionally, regional subsidies for innovative activities may be available. It’s crucial for builders to be aware of these opportunities and assist entrepreneurs in applying for them.

Acceleration Programs

These programs offer a valuable opportunity for additional financing and expertise during later stages of startup maturation. Builders often establish close relationships with acceleration programs, enhancing value for both the startup and the program. Such programs usually provide funding in exchange for equity in the company.

Investment Funds

External investment funds can be a vital financial ally during a company’s growth phases. Partnerships between builders and specific funds can expedite the investment process, reducing mistrust and uncertainty. Like accelerators, these funds typically offer financing in exchange for company equity.

Bank Loans

Traditional bank loans can also be a source of financing, albeit typically requiring collateral and subject to interest rates.

In all these cases, the venture builder plays a pivotal role in guiding and supporting startups through the complexities of external financing.

Understanding the General De Minimis Rule in the EU

Venture builders and startups in the European Union need to navigate State-aid rules carefully. The general de minimis regulation is only one regime, and sector-specific rules and exclusions may apply.

De Minimis Aid Limit

Under Article 3(2) of Commission Regulation (EU) 2023/2831, the total general de minimis aid granted by one Member State to a single undertaking must not exceed €300,000 over any three-year period. The limit is not restricted to subsidies financed by European funds.

Definition of a Single Undertaking

Article 2(2) treats linked enterprises as a single undertaking when specified control relationships exist. One of those relationships is an enterprise holding a majority of another enterprise’s shareholder or member voting rights. The regulation also covers certain rights to appoint or remove a majority of management and other forms of control.

This means a builder and controlled portfolio companies may share the same ceiling, but ownership above 50% is not the only relevant test. The complete ownership and control structure must be assessed.

Read Commission Regulation (EU) 2023/2831 on EUR-Lex

Strategic Ownership Decisions

Do not design an ownership structure around this short summary. Before applying for aid, obtain current advice on the relevant scheme, sector, Member State, cumulation rules, and the definition of a single undertaking.