The role of financial actors



Start-ups, by their very nature, do not have access to the same financial resources as larger or more mature companies. In fact, for start-ups operating in the knowledge and high-tech sectors, a number of barriers including high levels of uncertainty, presence of asymmetries information and lack of track record o guarantees successful, they limit the ability to obtain funding from traditional sources. This scenario is generally referred to as funding gapsituation that emerges when the funding requests of an enterprise are greater than the capital provided by small-scale providers of finance, but not sufficient to be considered by large-scale providers of private capital. 

Starting and growing an innovative business requires the financial capital. Access to finance refers to the ability of young and innovative companies to obtain the source of finance more appropriate applicable at their stage of development. 
An entrepreneur, before approaching the world of financial capitalshould answer the following four questions.

  1. What is the development phase of the business initiative (seed, early-stage, late-stage)?
  2. What kind of activity is behind the company (product company, technology company, consultancy company)?
  3. What is the attitude of the business group towards growth and shared ownership and control?
  4. What kind of resources are contributed by the different investors? 

Project development phase

What is the development phase of the entrepreneurial initiative (seed, early-stage, late-stage)?

A new enterprise typically follows a life cycle characterised by different stages of development. Depending on the stage at which the new venture is proceeding, different types of investors should be best suited to meet its financing needs. 

In the most embryonicpersonal funds, friends and family funds are the most suitable forms of financing. In more recent years, crowdfunding has also become an interesting opportunity to finance entrepreneurial projects at this early stage. In the stage of seedbusiness angels play the main role along with public grant funding to support entrepreneurship and innovation. Subsequentlyventure capitalists and other institutional investors become more active players in the financing process. Finally, in the maturity, the company could more easily access traditional forms of financing, such as bank financing. 

Project type /1

What type of activity is at the basis of the company (product company, technology company, consultancy company)?

By drawing a Cartesian plane in which the horizontal axis of abscissas represents time and the vertical axis of ordinates represents monetary value, it is possible to draw the curve of cash flows generated by the company. 

The area below the x-axis defines when the company is unable to create monetary value (has negative cash flows), and is referred to as the 'valley of death', while the area above the x-axis represents value creation (positive cash flows). This graph shows three points of interest. The depth of the curve indicates how much capital is needed for the development of the project. The point of intersection with the x-axis shows the tie point so the cash flows are zero. The slope of the curve shows the speed of growth.

Different companies show different trends. The enterprises of product require a limited amount of capital, they break even quickly. The combination of these two factors allows for a sustained speed of growth.
Le company of consultancy require even less investment, but the need to sell their services to physical customers (as opposed to the previous case where a product is sold with greater ease of penetration) limits the speed of growth, shifting the break-even point further down the line.
Finally, the high-tech companies are the cases where a large amount of initial investment capital is required, making the 'valley of death' very deep. This significantly delays the break-even point. However, once back up, the speed of growth is significantly higher than in previous cases.
From this analysis, one can see the importance of the financial capital required for projects with a strong innovative character. 

Ownership is control

What is the attitude of the entrepreneurial group towards growth and the sharing of ownership and control?

While so far we have talked about intrinsic business characteristics, the type of investor best suited for individual businesses also depends on certain characteristics of the entrepreneurin terms of aptitude for growth and propensity to share the control of the enterprise. Depending on the type of investor, in fact, the amount made available changes, thus determining a different speed of growth, and the amount of company shares to be shared with the investor also changes, thus limiting corporate control to a greater or lesser extent. 
The use of forms of bootsrapping, i.e. the practice of building a business from scratch with nothing but personal savings and through efficient management of resources, as well as reliance on the support of friends and family, allows one to retain full control of the business but with limited capital available. 
The use of government funds allows for an increase in the injection of capital useful for growth, generally while retaining full control or diluting it to a minimum. 
The use of debt capital increases capital while maintaining full control, but such forms of financing are rarely available to companies in their embryonic stages.
Finally, the use of venture capital through business angels and venture capitalists allows for more sustained growth through more capital, but at the expense of greater constraints for the entrepreneur due to having to share strategic, management and operational choices with the investor. 

Investor Resources

What kind of resources are contributed by the different investors? 

A further element to take into account when navigating the world of financial actors is to understand the type of support contributed, distinguishing between two macro categories: investment capital and management support. 

Business Angel are used to participate in start-ups that usually operate in sectors in which they themselves have accrued a high experience. This enables the individual investor to provide his or her own knowledge, which is vital for start-ups in the early stages of their growth. As seen above, however, capital is of minor than what is made available by other financial actors. Their participation can be made available through a syndicate organised with other Business Angels in order to increase the amount invested. 

Unlike a business angel, which invests personal capital, a fund of Venture Capital has in turn investors (called Limited Partners), usually professional entities such as Pension Funds, Foundations, Banks, which contribute capital and to which it must guarantee returns with high multipliers, due to the significant risk they assume. This ensures that the management contribution they make is driven by the objective of maximising investment returns.

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