What are the advantages and disadvantages of VCs and investment funds?

What is fundraising? 

Raising funds consists in finding investors or institutions (business angels, venture funds, venture capital, investment funds) likely to invest in the company's capital to finance a project. 

This type of financing is mainly aimed at innovative companies and start-ups with strong development potential . Investors (business angels or investment funds) aim to realize significant capital gains when they sell their shares. There are several moments in the life of a company to raise funds: 

1. To launch a project (seed financing), the launch of a new service or product: the amount is generally not very important and the investors are mainly business angels.
2. To recruit teams, improve offers, communicate: the amount is more important, and investment funds may be interested in the project.

How did VCs and investment funds come into being?

When one or more investors take a stake in an unlisted company, it is called Venture Capital.

The principle of the VC, investment funds and business angels is toinvest in young innovative companies in strong growth or betting on a strong growth.

The VC takes a minority stake in the company , hoping to realize a significant return on investment by selling the shares at the time of an exit (sale of the company to another player, new fundraising, etc.).

A little history

The VC is said to have been invented by Georges Doriot, a French general who created the American Research and Development Corporation (ARD ) after World War II. ARD is believed to be the first VC in the world who invested $70,000 in a company that would be valued at $355 million when it went public. 

What does the term VC mean?

The term VC actually covers several different things: 

• Classic funds that can be generalist but often have an investment thesis on a particular sector
• Fund with a large independent investor (this can be a personal fund or a family fund) 
• Fund being a network of business angels or smaller investors
• Fund linked to a large company called a corporate venture
• Other models such as startup studios that invest in and support startups

What are the benefits of fundraising? 

Possibility of financing the company's project

However, even if this is the purpose of fundraising, we must not forget that it allows to finance a project which is by nature risky.

No refund

Investors will receive shares in the company and their contributions will be equity. These funds, by nature, do not require repayment unlike bank loans

Strategic assistance

Whether it is a fund or an individual investor, these investments not only give the company credibility but also allow them to be supported (help with recruitment, access to new networks, contribution of specific skills, etc).

What are the drawbacks of fundraising? 

Not suitable for all types of businesses

The question of raising funds only arises if you have an ambitious growth project for your company that requires external financing, as is often the case with start-up companies. 

For example, an activity without economies of scale will have little chance of finding investors to support its project.

 Fundraising is expensive

It reduces the entrepreneur's assets by bringing in new players in the capital, and the entrepreneur therefore gives up part of his shares. These shares are sold to investment funds, VCs or business angels.

One of the biases is often not to consider this loss when considering a fundraiser and to consider it as a low-cost financing.

In addition, the entrepreneur must be accompanied bya business lawyer in the course of his or her raising, whose fees can quickly become expensive. 

Raising funds can have consequences on the way the company is managed

• Dilution of the partners in place, that is to say that they will have a less important part of the capital of the company, that can sometimes discourage the partners and thus demotivate them in their work for the company.
• Integration of partners with different interests: investors (investment funds, VCs or business angels) want to secure their investment and therefore envisage exits within the next 5 years in general, whereas partners sometimes have a longer time horizon in mind and want to keep their freedom and control over their company. 
• Complexity of the company's operation: the entrepreneur shares capital with a new investor who will sit in the decision-making bodies and with whom it will be necessary to agree on certain strategic decisions.
• The orientation of the strategy towards rapid value creation as the objective of the fund is to make a maximum multiple of its investment between entry and exit.
• The signature of a shareholder agreement imposes numerous constraints, notably in terms of shareholder liquidity and the obligation to invest the time of key personnel exclusively in the company's development project.

Raising funds is time consuming

It generally takes between 6 and 9 months to raise funds, because the entrepreneur must first identify investment funds that correspond to the project (funds specialized in certain sectors, etc.), approach the funds and then hold several meetings, the first of which is to present the project in a general way.

The investment fund will then carry out a due diligence and both parties will have to agree on the legal elements (term sheet, shareholder agreement, etc.).

Summary table of advantages and disadvantages of fundraising

What are the alternatives to fundraising?

If raising funds is too inconvenient for the entrepreneur, other alternatives exist:

• The bank loan: which can sometimes be difficult to obtain for a young company because it requires guarantees
• Public aids and subsidies (notably from the BPI)
• Self-financing: but requires that the company has a significant cash flow to invest
• RBF or Revenue Based Financing like Karmen, which is a non-dilutive financing solution for digital companies (especially those with recurring revenues) that offers a financing solution by analyzing company data (acquisition costs, estimated future revenues, ...). The RBF is in fact a cash advance, allowing to release capital for the growth of the company in a non-dilutive way.

How does RBF prepare and complete your fundraising?

FBR is the fastest financing solution, with a turnaround time of approximately 48 hours.

For an entrepreneur with large growth projects and considering a fundraising, the RBF complements and prepares a fundraising by allowing him to finance his activities during the fundraising and by improving his performance metrics. Thus, his company will be more valued and less diluted at the time of the raising. 

Karmen is a non-dilutive funding solution that helps digital businesses access instant growth capital. Instead of waiting for online or subscription revenues to be collected month after month, Karmen unlocks the annual value of those revenues, up front. Karmen's solution allows digital businesses to access instant growth capital, within 48 hours, to fund their growth expenses (customer acquisition, marketing, recruiting, technology and more). 

For start-ups, we are often their first source of growth capital to help them accelerate before raising funds. 

For venture-backed companies, we provide an additional source of non-dilutive, founder-friendly capital to help entrepreneurs achieve their growth objectives, while retaining ownership of their company. 

Recently, Karmen launched three new products: Karmen Invoice Financing, Karmen Grow and Karmen Runway. 

Fundraising is a very common method of financing, which is time-consuming and costly, but can be strategically important for the company. The key is to use the right financing tools at the right time, such as RBF.

Apply for financing with Karmen and find out how much you qualify for!