by Eloisa Marchesoni
The inspiration to write this article was the numerous messages that I get every day, which, no matter the wording, all boil down to the following question: what is the best way to finance a start-up? This, in fact, is the question of every startupper and it was one of my biggest dilemmas, too, when I myself was working as a core team member of a newly born, highly technological business.
The good and bad news is that the methods to finance a start-up are many, and each one of them has its pros and cons, thus forcing the team and its advisors to analyze the project very carefully and understand what it needs to be successful.
Before going into the details of the two methods that I most prefer as means to finance a start-up, I want to make a brief, but important point.
Rather than asking yourself how to finance a start-up or undertaking the very rough quest on LinkedIn to look for potential investors, take the time to make sure that your product or service is really as innovative as you say it is and that you have a suitable team to execute the business strategy, according to plans – if you have planned it, and you should have! Investing time on a product or service means, first of all, having worked on different MVPs, which must have been tested and validated.
Also, before seeking funds, every start-up should aim to at least get:
1. A high Lifetime Value (LTV), i.e., Recurring Revenue VS Total Revenue;
2. An appealing Users VS Revenues report. In fact, for example, if the subscribers to your newsletter are 1 million and you have 1 million fans on social media such as Facebook, Twitter and Instagram (so-called “vanity metrics”), but generate a few leads on sales, then nobody will want to invest in your start-up;
3. High potential profitability for your business;
4. A good sense of the cost of acquiring a new customer and other related indicators;
5. A monthly growth in absolute high terms;
6. Satisfying results for other important indicators: the number of downloads (for an app), the burn rate (monthly, net burn and gross), number of active users, etc.
Now, we are ready to talk about how to finance a start-up. Out of all the methods that are usually used, I am going to concentrate on addressing the two of them that I have mostly become familiar with and that have given to me, as an advisor, the greatest satisfactions: crowdfunding – especially the equity kind – and ICO.
Speaking of crowdfunding, there are two main types:
• Reward Crowdfunding, where, in exchange for an economic contribution from those who support your project, you promise a “reward” that could, for example, be a preview access to your services.
• Equity Crowdfunding, which, on the other hand, is a way of financing for start-ups that allows them to raise capital for the sale of shares in their company.
I personally consider the first type a more than valid alternative in the seed phase, while, in the early growth phase of the start-up, I would address the equity crowdfunding type. There are many pros to this method of fundraising. In fact, in the seed phase, it is possible to raise funds among the “enthusiasts” for a particular kind of product or service that will be developed later, and, for start-ups with an already consolidated business, equity crowdfunding could also be a useful alternative to venture capital. Moreover, crowdfunding often is an excellent test to evaluate the product or service on the reference market.
Cons are that the current costs of a crowdfunding campaign can be high. Thus, one must pay close attention to the crowdfunding platform that will be chosen as a partner, in order to limit the risk of failure.
Going on to speak about Initial Coin Offerings (ICO), a good way to look at it, even if to the non-insiders may seem like I’m speaking Ostrogoth, is as nothing but an alternative method of financing for start-ups that do not intend to resort to the traditional methods of collecting capital. Very briefly explained and omitting many details, an ICO works more or less like this: a token is created, which serves to buy the services offered by the company in question, and buyers/investors buy these tokens using the cryptocurrencies that they have in their digital wallets. The investors usually use Ethereum, which, like any other cryptocurrency, can then be kept or traded freely on the market, much similarly to the stock of any company. The tokens can, depending on the ICO, also give the right to enjoy certain rights.
If well planned and launched on a solid project that can catch the attention of the public, an ICO can give access to funding volumes far greater than any other method of raising capital.
A big downside is that the ICO argument is controversial and a lot of disinformation and deregulation still prevails on the subject. Anyway, if properly regulated, the ICO market can challenge many of the cornerstones of traditional financing.
Start-ups may appeal to this kind of fundraising method at any stage of life of the business, even after having collected funds with traditional methods. One combination that has proved to be very successful is that of equity crowdfunding followed by an ICO, and the best example that I have personally witnessed is the case of FidelityHouse, an Italian-born project that was able to rapidly reach an international scale and sky-rocketing results, still to this day growing its fame in the blockchain and social content network industries.
FidelityHouse is a blockchain-based platform for content aggregation that combines journalism and information crowdsourcing, oriented to social media. It is a social content network with the aim of changing the way that information is created, processed and valued, making it easier, multi-channel, social and transparent. In 2018, the start-up went through a successful first private round, which was accompanied by the entry of new members in the team itself, and then went on with the second round in its financial roadmap, consisting in a public offering of equity crowdfunding, followed by an ICO round 3 at the end of the year. The FidelityHouse campaign on mamacrowd.com reached hard cap, equal to €650,000, in less than 24 hours, thus becoming the most performing campaign in the history of the MamaCrowd platform. In the meantime, the corporate structure has evolved, raising the interest of additional investors and increasing the number of shareholders in the company.
Long story short, new entrepreneurs these days prefer the lesser risk of a proven business model, with real revenue and customers, ready to scale, in comparison to the more conventional finance approaches of Angel and Venture Capital investors. Creative thinking is not only key to coming up with the business idea but can also a winning approach.