A fresh look at financial analysis
Startups, by their very nature, have an innovative capacity, which implies an economic strategy very different from that of a traditional business.
First, their business model is uncertain: some create an audience before monetising it, others offer free services (freemiums) before moving to a paying basis. They may well generate no revenue until after one or more years of operation. Their working capital requirement (WCR) will therefore have to be financed in a specific way in the early stage (first months), and then differently in the flight stage. Potential investors will evaluate the burn rate, ie., the rate at which the startup is spending its capital and accepting negative cash-flow while waiting for the first profits to roll in.
Other aspects specific to startups: they may need investment credit to finance part of their tangible or intangible resources, such as R&D, essential for innovation. Once a business reaches a certain degree of maturity, its entrepreneurs may be tempted to float the company on a stock exchange to diversify its shareholding, obtaining the benefit of an attractive valuation while retaining control of the company.
To estimate startup valuations and the risk of investing in them, financial institutions therefore have to adjust their analysis matrix. Banks have been well aware of this and, these days, are increasingly training their account managers in innovation issues so that they understand the needs of budding tech-companies and can finance them appropriately.
BNP Paribas consultants, for example, focus their analysis on the startup's development and growth prospects, the quality of its management, and its cash-flow plan, within a qualified ecosystem (incubators or accelerators, BPI Innovation hub, investment funds, etc).
Different solutions at each stage of development
Early-stage startups have a choice of different business startup paths: take the business angel route, take out an unsecured, interest-free "loan on trust", or apply for loans specifically for innovation projects, business startup loans, or opt for crowdfunding.
Once they have taken off and are in the flight stage, startups are looking to build a risk-capital fund to finance their WCR, for example, or to go international. Lastly, once they have reached maturity, they may need more-traditional financing to consolidate their business.
START-UPS CAN Benefit FROM BNP PARIBAS vast netWork of financial partners.
How do banks support startups financially through all these stages? First, they can invest in seed funds or risk-capital funds that back projects in the early stages of development. It is with this in mind that BNP Paribas created the WAI Investment Fund which invests in seed-capital and risk-capital funds.
Banks can also help startups raise funds by reassuring investors, or by helping them grow their capital by selecting the most appropriate funds, or indeed by investing in them directly. This is what BNP Paribas does via WAI Venture Fund, through its subsidiary BNP Paribas Développement.
Last but not least, banks can set up partnerships with funding agencies to facilitate grants to startups. In this way, BNP Paribas offers young companies the opportunity to benefit from its vast network of financial partners such as Bpifrance or Initiative France, the leading financial networking association for business founders.
Cooperation that goes far beyond investment
Financing is not the sole key to success. Startups also need advice on a vast range of topics to ensure their business is sustainable and to grow visibility: prototype commercialisation / industrialisation, user experience, communication and marketing, recruitment, internationalisation, etc.
This is the opportunity for banks to go the next mile in their relationships with business founders by combining financial backing with support mechanisms specifically for young entities. The acceleration programs offered by BNP Paribas (BNP Paribas Plug and Play or We Are Innovation, also available to mid-size companies) meet these complementary needs: access to platforms dedicated to innovation, to a wider professional network, to make the dream a reality (with customers, and potential partners among the majors...).
For startups planning to go international, banks can also provide their expertise in export finance, which is a specific field, as well as a priceless network of international business centres with intimate knowledge of the playing field (regulations, informal practices, etc).
Far beyond purely financing, banks also forge increasingly close relationships of trust with startups, in a booming climate for innovation. This engagement has a dual benefit: it boosts economic growth and French innovation while creating useful synergies for business transformation for banks and other enterprises.
Photo credits : header ©Jacob Lund // ©bernardbodo