Ask any entrepreneur what the biggest challenges are in starting a business, and it is likely that funding is mentioned frequently. Especially in the growth phase, investing in operations is vital. But where can you get the money to scale up? Yesterday’s Scale Up Academy invited 32 startups to the session on ‘How to fund your Innovation like a Pro’.
How to get Funding – PNO Consultants
Funding startup growth often starts at the wallet of the entrepreneur and revenue made in the last year(s), however, often this is not enough. There are many public and private sources for funding. PNO Consultants shared the possibilities for innovative startups.
There are many options in the public financing landscape for innovative startups. Governments have a simple wish: that existing companies are challenged by innovation in areas like technology, sustainability and human resources. To fulfill this wish, they provide subsidies to innovative startups and scale-ups. There are four levels on which a startup can apply for subsidies.
Subsidies at higher levels in the pyramid generate a higher payout, however, they also cost more time and effort, while the chances of them being granted decrease. National subsidies are easier to manage, also because the rules are clearer. Since many startups do not have the capacity to spend up to a year on the sweet fruit, it’s advisable to start at national level, where there are a few cash boxes to pick from.
WBSO is a wage tax reduction on R&D hours. If you can show that you spend 30% of your time on research for innovation, then you get a tax reduction for this 30% of the hours made. This fiscal scheme takes weight off your burn rate and the effort to get it granted is fairly low. When already at the market, the Innovation Box can be interesting to consider. It is a corporate tax reduction for innovation profits, so simply said, taxes are lower on any money made because of innovation.
For companies facing a high technical risk, ‘Proof of Concept Credit’ can be of great help. Private investors generally require proof of concept, but with a ground breaking technical revolution, this proof of concept is hard to acquire without an investment. With a PoC Credit, the first stage of your technical innovation is covered, so that investors are probably more willing to invest in follow-up stages of development. Going from proof of concept to the market can be funded through Innovation Credit, however the requirement for this is to already have private investors on board. An advantage of the Innovation Credit: if your innovation fails due to technical reasons, the loan becomes a subsidy.
For national specific investments from the government, there are generally 2 options. The first is MIT Feasibility, which grants a feasibility study. The disadvantage here is that the government receives a lot of requests for this cash-in, so the order of handling is done by lottery. The second option is an MIT R&D Cooperation. The requirement here is that you work together with another SMB company, with which you cannot have a supplier/client relationship. On EU-decentral level, startups can apply for EUROSTARS 2, a grant for R&D cooperation if you have a partner in the EUROSTARS area.
TIPS & TRICKS
- Preparation takes time – start early;
- Learn about the goals of the specific program you choose to apply for (general goal, TRLs, type of company, etc.);
- Inform yourself about the formal documentation and appendices required for the application, and make sure you are in the position to sign any application;
- Take time to carefully study official publications; do not trust leaflets or extracts on (government) websites. Deadlines can differ, so take a close look and be on time;
- Learn about the award mechanism: first-come-first-serve means filing your application on the opening day, tender means filing before the final deadline.
- On deadline day, maintain sufficient margin for filing of the application;
- Try to involve a second (informed) reader for critical review;
- Again: study the official regulations/laws. Pay special attention to ineligibility criteria.
Getting public financing without a private investor on board is difficult in most cases, because often there must be a running operation to even be considered for a subsidy by the government. It is always smart to get advice from a knowledgeable consultant in this area, however try to do as much as you can yourself. It can save you a lot of money.
Where to get private funding from, depends on your network and access to investors. Fortunately, there are many Venture Capitalists in the Netherlands that can help SMB’s to find the proper funding for their business.
TIP 1: be careful with giving away a percentage of your company for an investment, now it could be attractive, but later it can break up your company drastically.
TIP 2: more financing rounds are not necessarily better. Every round costs a lot of time and doing less rounds makes you think harder and wiser about what you really need. Never ask funding for more than 18 months.
How to convince investors – Amsterdam Venture Partners
The hard truth is that most startups fail, where conservative startups still carry a large risk. To attract investors, startups must tell a story that makes it likely to believe that the same company will be fifteen times more valuable in five years’ time. Venture Capitalists invest money from others, and Amsterdam Venture Partners helps startups with ‘Startup Banking’.
Investor ‘Pete’ says: “what a great idea! Come back to me when your team is complete”. There are two options here: Pete gave you a polite ‘no’, because he thinks your idea sucks. The second option is that Pete likes it, but is managing his risk. By making the team complete, risk has dropped and therefore it is a more solid investment. How to handle this? Respond: “that is fine, we will come back when our team is complete, but since our worth then goes up by 10%, we expect an increased valuation of 8%”. This is where waiting for the investor starts to hurt, because risk management now starts to cost money.
How to pitch your startup
There is a vital difference between having a good product and being a good investment. Will the stock price go up? Will your product create traction in the market? Are you serving the needs of your customers better than anyone else, and is this a sustainable advantage? That is what an investor wants to know. Within your pitch, of course explain your product briefly, but move on to the ‘being a great investment’ part as soon as possible.
Making a swift start does not mean a linear growth in the first years. Growth will stagnate at some point and investors will ask about this. Make sure you have a grounded answer to the question. If the reason is that your operation is still healthy, but investment is needed to expand production and scale up growth, then that is a solid answer. However, when the answer is that the market is changing and moving along is difficult, then the conversation will end then and there.
Next up: Scale Up Academy – Pitch perfect
Yesterday’s Scale Up Academy brought many new insights to participants. Getting investments can be a great challenge, but if you know where to look and what to look for, that can help enormously. The jury process for the Accenture Innovation Awards 2017 started and the ten semi-finalists will soon pitch their innovation at the central jury event on September 25 in B.Amsterdam. The next Scale Up Academy will be all about pitching your concept, and is especially for the semi-finalists at Boom Chicago!