How should a startup be financed?

The options are multiple

The startups should be financed in an environment of high liquidity, with an entrepreneurial ecosystem with a high number of projects and many potential investors. However, Spanish entrepreneurs have a general complaint added to the dificulty of accessing funding for their projects: it is necessary to turn to the three FFFs (Family, Friends and Fools). But is this really a problem? At Fellow Funders we think it is not.

In an article published by journalist Sérvula Bueno in “El Economista“, she indicated that 81% of Spanish entrepreneurs used the 3 FFFs to launch their initiative. Is this the most correct option? We think so.

When a project contacts Fellow Funders looking for funding, one of the first questions we ask entrepreneurs is whether they already have a Minimum Viable Product. If it is already in the market and especially how they have been financed so far.

We believe that there is a logical order that must be followed in order to obtain financial resources for a startup:

First step: the entrepreneur must finance himself through the 3 FFFs.

If their closest circle of friends do not believe in their project and in them as entrepreneurs, why should outsiders believe in them? At Fellow Funders we believe that the design work of the PMV and the first marketing efforts should be financed by own funds and not by third parties.

Second step: the entrepreneur should explore the multiple options of public support through grants (CDTI, Enisa, ICO, …).

With the diversity of grants offered by the different administrations to support startups, it is essential that entrepreneurs spend some time analyzing them and managing to obtain those that may be more favorable to them. It is a complicated job, but there are many companies that can help them. If an entrepreneur does not manage to obtain “cheap public money”, why should we believe that he will be able to manage the development and growth of his startup with private money from others?

Final step: the entrepreneur can manage to raise money from private investors.

At Fellow Funders we believe that when the startup has reached the market, and requires an acceleration of its growth, it is the time to incorporate new investors. A critical aspect at this point is the correct valuation of the company. This will determine the percentage of shares or participations that the entrepreneur gives to investors. At Fellow Funders we have developed our own algorithm for valuing startups that allows us to do it in a professional and adjusted way.

Another common question asked by many entrepreneurs is whether they should ask for a loan to face these initial stages of their company. We do not think it is appropriate for a company to be born with financial obligations. Although they could have favorable conditions (in interest rate, guarantees, repayment terms…) they will force the entrepreneur to focus his attention on aspects other than the really important one: the growth of his company.

However, at Fellow Funders we never tire of insisting to entrepreneurs that the real funding for their project must come from the market. In other words, from the customers who buy your product. Any other form of financing must be exceptional. A project that is based exclusively on public subsidies and/or successive rounds of external financing has a high component of speculation and uncertainty that makes the risks assumed by investors difficult to quantify and control.

At Fellow Funders we remain committed to helping Spanish startups and SMEs to regenerate the industrial fabric, but properly assessing the risks and demanding a return appropriate to the risks assumed.

Remember that the key to maintaining adequate risk levels is to diversify your portfolio.