Finance startups
To a certain extent, the builder is a fund manager. That is to say: investors deposit their assets in the builder, trusting that the builder will invest it intelligently to extract a return.
That is why we say that financing startups is one of the key activities of the builder, and management must perfectly understand the possible financing strategies to elucidate the most convenient way to manage money and increase the valuation of the portfolio.
Account for assets​
A common mistake that a builder's management can make is offering services to the startups without charging for them. This practice may seem sensible at first glance; it certainly seems easier in the short term, but it is bad practice. Why is it a mistake, and what is the correct way to do it?
Let's analyze a practical case. Let's imagine that a venture builder invests money in setting up a startup. In addition to this money, the builder develops a mobile application for the startup, whose market cost is around $20,000. Now we propose two scenarios:
In the first scenario, the venture builder has invested 50,000, but has only invested $30,000**.
In the second scenario, on the other hand, the builder has invested more money, 20,000 for the development of the app. In this case, the builder has declared the value of the app. In total, the builder has indeed incurred in a cost of $50,000, but all of it has been invested.
As we can see, in both cases, the money that ends up remaining in the startup's coffers is 50,000 to establish the company and develop the app. However, in the second case, the company's accounting balance shows an asset of $20,000, while in the first case, there is no asset to account for.
In simplified terms, this is important because assets represent the investments that a company has made. Anything that is not accounted for cannot be considered an investment. This becomes a problem when the company seeks a loan from a bank or approaches investors, especially institutional ones.
However, when the builder decides to invest additional money and subsequently develops a service for the startup for that same amount, they record the expense and generate an asset.
Furthermore, the company's share capital is another factor that influences the company's valuation and its creditworthiness. When a company has a high share capital, it becomes clearer that the partners are risking their capital. As shown below, the share capital is significantly higher in the second scenario:
| Scenario A | Scenario B | |
|---|---|---|
| CEO Contribution | $600 | $600 |
| CTO Contribution | $600 | $600 |
| Builder Contribution | $30.000 | $50.000 |
| Social capital of the company | $31.200 | $51.100 |
Let us remember that the first key activity of a builder is to increase the value of the portfolio. This valuation, from the strictest point of view, is the accounting valuation. Therefore, when the builder issues invoices for their services, they are accounting for the contribution of assets, thereby contributing to increasing the valuation of the company. This effect is even more pronounced when the builder offsets this expense with an additional monetary contribution.
Investment Methodology​
Sigle-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.
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 Subsidies and the De Minimis Rule in the EU​
Venture builders and startups in the European Union need to navigate the regulations surrounding institutional subsidies carefully, particularly the limitations set by the de minimis rule.
De Minimis Aid Limit​
As per Article 3.2 of REGULATION (EU) No. 1407/2013, no European company can receive more than $200,000 in subsidies financed by European funds within a three-year period. The regulation states:
"the total amount of de minimis aid granted by a Member State to a single company will not exceed $200,000 during any period of three fiscal years."
Definition of 'Single Company'​
Article 2.2 provides a crucial definition impacting venture builders:
"'Single company', for the purposes of this Regulation, includes all companies that have at least one of the following links with each other: a) a company holds the majority of the voting rights of the shareholders or partners of another company;"
This implies that if a venture builder owns more than 50% of the startups, all of the builder's companies must be considered as a single entity under Regulation 1407/2013. Therefore, the collective group of startups will be eligible for no more than $200,000 of European funding in three years.
Strategic Ownership Decisions​
Given that grants are vital for startup financing, this limitation can lead management to decide against the venture builder holding more than 50% of a startup's shares, to avoid being classified as a 'single company' under this regulation.
These regulations emphasize the importance of strategic planning and understanding the legal framework within the European Union for venture builders and startups seeking subsidies.