Startups & Open Innovation
In earlier articles in this series (see here) we looked at the key role of venture capital funds, the reasons and setbacks associated with startups’ exclusive dependence on equity rounds, together with the advantages that debt would have for them. We also determined that this is a promising environment for borrowing. Then we looked at the difficulty with providing general recipes for raising debt finance and a few routes that do not seem very promising for startups, such as commercial banks and their ordinary channels and conventional bond issues. In our latest article we explored venture debt as a suitable debt financing mechanism for startups. And here we analyze the importance of security interests and of thinking up ways to use new intangibles.
In earlier articles in this series (see here and here) we explained the reasons and setbacks, for founders in particular, of startups’ dependence on equity as the only source of finance, together with the advantages that debt would have for them. We also described how the environment is right for opening up routes to obtain debt finance. Lastly we looked at the difficulty with providing general recipes for raising debt finance and a few routes that do not appear to be very promising options for startups, such as commercial banks and their ordinary channels and conventional bond issues. Now we take a look at a first form of debt finance that does look like a way forward.
In the previous article in this series, we explained, in relation to the necessary and very positive contribution that venture capital funds make to the ecosystem, a few setbacks associated with startups’ exclusive dependence on equity rounds, especially for their founders, and how increasing their debt levels could counter those setbacks. In this new article, we look at the advantages of debt, the opportunity afforded by the current environment and study a few first and hypothetical routes to get debt financing.
In the current situation, obtaining finance can be key for many startups, both to cover cash needs and to be able to implement new growth projects. Therefore, it is essential to identify the public or private aid which is available to entrepreneurs. In this case, we analyze the public aid that can be found in Portugal.
Searching for additional financing routes, in the form of debt rather than equity, could benefit startup founders by curtailing their dilution in equity rounds and also have other advantages for the companies themselves. This would contribute to encouraging more young entrepreneurs to start and carry on with their projects and would also benefit venture capital funds, key and irreplaceable players, in that they would have more and stronger investment opportunities.
When drafting, negotiating and signing a shareholders’ agreement as a consequence of an investment round in which a venture capital fund (fund) acquires a stake in the share capital of a startup, the fund must be clear about what fundamental clauses should be included for its greater protection from the founders of the startup who have been managing the company since its incorporation. Likewise, every entrepreneur/founder must understand that such shareholders’ agreement will include certain essential clauses so that a fund is fully protected when it invests in a startup.