How to finance a start-up?

The main problem of every entrepreneur is precisely to find the subjects who believe in the innovative project of the start-up and decide to finance it

From the initial stage (so-called pre-seed), every start-up has to face countless costs, including those for:

the establishment and initial phase;
permits and licenses;
marketing and advertising;
legal and tax practices;
the purchase or rental of premises, equipment and materials;
employees (salaries, social security, insurance, etc.);
advice from experienced professionals;
the development of the main product(s) or service(s);
market and competitor analysis.

In order to assess the sustainability and feasibility of its commercial strategy, the start-up must indicate in the business plan – which we discussed in detail in a previous article – all the ways in which all the aforementioned expenses will be financed.

The methods of financing a start-up

Each business strategy, in fact, requires adequate and continuous economic resources to implement the project within the set times.

However, the main problem of every entrepreneur is precisely to find the subjects who believe in the innovative project of the start-up and decide to finance it.

Loans from friends or relatives can generally support ordinary expenses in the short term and loans received from credit institutions are difficult to obtain, as well as objectively burdensome in the medium – term.

So what’s the best solution?

In the previous article “how to create a start-up company in Italy“, we mentioned the main sources of financing (“business angels”, “crowdfunding”, “venture capital”, incubators and accelerators, public incentives, etc.) which, due to their characteristics, are ideal for financing a start-up.

Let’s analyze them in detail.

The “Business Angels”

Business angels are generally entrepreneurs or managers in business or retirement, with substantial financial resources, who intend to contribute to the development of start-ups, making available their economic resources, their network of knowledge, and an excellent set of skills acquired in time.

Thanks to their experience, they are usually able to evaluate the goodness of the start-up project and the consequent convenience of the investment, but our advice is to present an accurate and realistic business plan, so as to entice them to invest with conviction in the your project and – perhaps – to create a consortium with other business angels.

What is the average investment?

In our country, business angels invest from a minimum of 5,000 Euros to a maximum of 200,000 Euros (rarely reaching 500,000 Euros), against the sale of part of the shares of the start-up.

It should also be remembered that the Italian State encourages the investment of individuals in the capital of innovative start-ups and SMEs, providing for a tax credit of 50%, pursuant to art. 38, paragraphs 7 and 8 of the Relaunch Decree (D.L. 34/2020) (click here to find out more).

How to find a business angel for your start-up?

In Italy there are many associations that favor the meeting between start-ups and business angels, including:

Italian Business Angel Network (IBAN).
Italian Angels for Growth.
The Investors Club.
Successful custodians.
Angel partner group.
We are business angels (WABA).

The numbers

According to a research conducted in 2020 by the SIM (Social Innovation Monitor) of the “Politecnico di Torino”, in Italy there are 1014 Business Angels, of which 70% are located in Northern Italy.

60% of business angels invest mainly in Italian start-ups and, above all, in the sectors of “Digital Services & ICT”, “Biotech and Healthcare” and “Fintech & Big Data Tech”.

Finally, Venture Capital Monitor (VeM) estimated that in 2020, despite the pandemic, about 330 transactions were carried out by business angels, for a total amount of € 640 million.

The “crowdfunding”

Crowdfunding is a type of collective financing requested from the community (usually from the web) through a specific platform controlled by Consob, on which the start-up exhibits its project and establishes a target (eg: 200,000 euros to support the planning and the production of a prototype).

Crowdfunding is an excellent tool not only for obtaining the pre-established budget, but also for assessing consumer satisfaction with the corporate project and, if successful, “validating” the products/services offered.

Crowdfunding can take several forms:

Donation, through which the financiers (indeed, the donors) donate their share, without obtaining back any reward, return or participation in the profits of the company.
This method is preferred above all by NGOs to finance non-profit social projects, but hardly by start-ups.
Lending (loan), through which the entrepreneur obtains a loan directly from a private individual registered on the platform, who acts as an intermediary, setting the date for the return of the money, including interest.
This method is also rarely used by start-ups, due to the modest amount of sums that a private individual is willing to pay and the existence of a more profitable alternative, represented by business angels and venture capitalists.
REWARD: with which lenders usually receive from the start-up, as a reward for their investment, a presale or preview use of the product/service; or – sometimes – an invitation to actively collaborate for the development of the product/service.
Reward-based crowdfunding has the dual function of getting the start-up a loan and, at the same time, a market feedback from the early adopters (the first users of the product/service), who will validate (or not) the idea. at the base of the project.
EQUITY: through this method – the preferred by start-ups – the lender, by paying a certain sum, receives the corresponding share or share (equity) of the start-up, becoming a minority shareholder by right.
In case of success of the start-up, therefore, the new shareholder will be entitled to receive a part of the profits earned by the same.

The special list of crowdfunding platform managers is kept by Consob. Among the main ones in Italy (especially for equity crowdfunding) we find: MamaCrowd, Crowdfundme, 200crowd, Opstart

The “Venture Capital”

Venture Capitalists (VCs) are investors (companies, investment funds, etc.) who make their venture capital available to finance the start-up or growth of innovative start-ups or companies that do not have access to the stock market, in exchange – generally – for a significant stake/share in the company or for a significant position on the Board of Directors.

Compared to business angels, they tend to invest in the start-up after it has passed the initial phase, usually (but not always) coming into play following the validation of the product/service.

Why rely on a Venture Capitalist?

For the start-up, the investment by Venture Capitalists – and their presence on the Board of Directors – is (potentially) an important driver for economic and commercial growth.

The advantages for the start-up, in fact, are considerable: introduction of new capital; support in managerial, fiscal and management fields; network expansion; attracting new investors; advertising and brand development, etc.

The disadvantages, however, are often proportionate to the investment: generally Venture Capitalists obtain an important role in the Board of Directors and this almost always determines the subtraction of decision-making power from the founders/managers of the start-up and a decisive change of strategy from part of the VC.

For Venture Capitalists, therefore, the investment is highly risky – given the probability of failure of start-ups – but any success obtained by the company generates an exceptional economic return in the medium to long term.

For this reason, a solid innovative project, with considerable probability of success, encourages Venture Capitalists to invest in the capital of the start-up and to support it in the growth process.

The National Fund for Innovation

Also the Ministry of Economic Development, by allocating 200 million Euros in favor of the National Fund for Innovation (FNI) – the public fund to support Venture Capital – aims to incentivize investments in the capital of start-ups and innovative SMEs , by qualified parties.

We talked about it in a previous article (click here to read it).

Incubators and acceleration programs

Incubators for innovative start-ups are companies that make the premises, equipment and skills of their professionals available to support the business strategy of the start-up in the start-up phase (incubation) of the latter.

Therefore, they have the function of assisting and supporting innovative start-ups in their growth path, providing them with both infrastructures, equipment and the skills of professionals in the workforce, as well as contacts with other market operators and investors (venture capitalists, business angels, etc.).

Their contribution in favor of start-ups, therefore, is not strictly financial – on the contrary, they are paid with a fee or with the work for equity formula, or they get a share of the start-up, as consideration for the services offered – but equally important from an economic and network expansion point of view.

In the previous articles (“Innovative start-up incubators: how do they work?) (Link) and “The certified incubators: the requirements for enrolling in the special register”) we have analyzed them in depth.

Accelerators, on the other hand, despite having the same function as incubators, support start-ups that have already defined the business model and validated their product / service, thus coming into play in the phase following the start-up phase (seed or second stage).

Incentives

The European Union, Italy and italian Regions reserve innumerable incentives for innovative start-ups – in the form of subsidized loans and grants – to support them in the initial phase and in the sustainable development of the business project.

Among the most relevant there are certainly:

Smart & Start Italia, which provides for a zero-interest loan, without any guarantee, to cover 80% of eligible expenses between € 100,000 and € 1.5 million, for the purchase of investment goods, services, expenses personnel and company operating costs. We talked about it in depth in a previous article.
Smart Money, with which the MISE allocates grants for:
- support innovative start-ups in supporting the costs associated with the implementation of an activity plan in collaboration with the actors of the innovation ecosystem, operating for the development of innovative companies.
- Allow the players of the innovation ecosystem to enter the risk capital of innovative start-ups. We also talked about this measure in a previous article (click here to read it).
National Innovation Fund – CDP Venture Capital, which we talked about above, in the paragraph relating to Venture Capitalists, as well as in a previous article (click here to read it).
Digital transformation, which finances projects for amounts up to 100 million Euros, on the basis of a nominal percentage of eligible costs and expenses equal to 50%, of which 10% in the form of a contribution and 40% as a subsidized loan. We analyzed it in a previous article (click here to read it).
Announcements for the development of industrial property (trademarks, patents, designs, etc.):
- Patent box: it is a facilitated taxation regime that concerns business income deriving from the use of software protected by copyright, industrial patents, designs and models, which we discussed in the previous article “Patent box: recipients and application“.
- Voucher 3I: innovative start-ups registered in the special register can finance the consultancy services necessary to enhance and protect their patents for industrial inventions in Italy and abroad (prior art search, analysis of patentability requirements, drafting and filing of a national and international patent application). We talked about it in a previous article (click here to read it).
- “Patents +“: a measure envisaged by the MISE – currently suspended due to the exhaustion of funds – which provides for grants up to a maximum of 140,000 Euros, to purchase the following specialized services aimed at enhancing and economically exploiting patents on the national market and/or international:
  - industrialization and patent engineering;
  - organization and development;
  - technology transfer.
    We analyzed this measure in a previous article: (click here to read it).
- “Drawings +“: a measure envisaged by the MISE – currently suspended due to the exhaustion of funds – which consists in the provision of concessions aimed at the purchase of external specialized services – up to the extent of 80% and up to a maximum of € 75,000,00 – to incentivize:
  - (phase 1) the production of new products related to a registered design/model (maximum amount of subsidies: € 65,000.00);
  - (phase 2) the marketing of a registered design/model (maximum amount of the facilitated.
    We talked about it in a previous article: (click here to read it).
- “Trademarks +“: a measure envisaged by the MISE – currently suspended due to the exhaustion of funds – which provides for the reimbursement of all expenses incurred – within the amount of 80% (or 90% in case of designation c / o USA and / or China) and a maximum of 20,000 Euros – for prior art searches and filing of the European or international trademark, for the reimbursement of filing fees, as well as for actions to protect the same, carried out by a lawyer registered in the register or an IP consultant.
  We analyzed this measure in a previous article: (click here to read it).

Our “incentives for companies” page updates you with all the most relevant measures for innovative start-ups (click here to open it).

The importance of legal and tax support

How to choose between all these sources of funding?

Our advice, especially in the early stages, is to rely on serious, qualified professionals with proven experience in business consultancy, who will guide you with confidence in choosing the safest and most profitable financing methods for your business strategy.

Our Law Firm, thanks to the expertise and experience in consulting and assistance to start-ups, both in the legal, commercial and corporate fields:

provides all entrepreneurs interested in starting their own start-up or defining an optimal business strategy, advice and specific assistance in bureaucratic and commercial practices;
assists its clients in the market analysis phase, in the preparation of the business plan and in the search for the economic resources necessary to finance the start-up;
supports the company at every stage of development, recommending the best commercial and legal strategies to be implemented.

Contact us immediately at the numbers +39 0683521985 or +39 3711453121, or write to us at info@studiolegalecoscia.it for specific advice.