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Why startups raise money : 7 reasons

Why do startups raise funds? This is a legitimate question because when we hear that a startup has raised hundreds of thousands or millions of euros, without explaining the usefulness of this amount, the collective imagination has grown to believe that raising funds is an end in itself. However, fundraising meets essential needs for startups.

Advimotion is a financial consulting firm that assists startups and SMEs in obtaining non-dilutive financing and equity fundraising. We also act as advisors in corporate divestiture transactions to best represent the interests of sellers.

We offer strategic consulting and outsourced CFO services to ensure the financial and operational monitoring of your business. Finally, we take care of the drafting of investor documentation: business plan, pitch deck, creation of reporting files and valuation calculations.

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The different uses of fundraising

1. Financing your start-up

Why raise funds at the startup’s inception? First of all, there is the financing of the working capital needs. Indeed, if the startup sells physical products for example, it will have to build up stocks of goods even before getting its first customer. Thus, the startup is taking money out of its coffers before it has even started its activity. It must therefore find a way to finance this advance in working capital.

The research and development phase is an essential and sometimes “capital intensive” phase from the startup’s inception. It can take several forms: it can be the development of a new product, the elaboration of a web platform or even advanced research in scientific fields. Nowadays it is complicated to raise equity without any proof of concept but alternatives exist such as love money, participatory financing or grants.

At the beginning, there is also the problem for a start-up to get known, hence the need to finance a marketing and communication campaign to acquire new customers. If the start-up does not have the necessary funds, it will be complicated to properly launch its activity.

2. Strengthen your equity for a loan

Raising funds can be an excellent way for a start-up to strengthen its equity in order to convince banks more easily to obtain a loan. Also, the higher the equity, the higher the amount requested from the banking partner.

In addition, public funding bodies (e.g. entities providing honorary loans or public grants) require a minimum level of equity in order to grant support.

3. Financing the operating cycle

Raising funds allows the startup to keep a good financial health on a daily basis. The start-up must always have cash on hand to cover receivables, build up inventory and pay suppliers.

Hiring operational and sales profiles is also important to create traction for the company. It is often necessary to invest in human resources, equipment and communication to create growth.

4. Financing the growth of startups that have already completed their proof of concept

In the growth phase, startups raise funds to anticipate increasing customer demand. The need for financing is therefore to hire new employees, a larger communication budget or to modernize IT tools for technology startups.

The growth phase where many entrepreneurs seek to “scale up” is a crucial phase that requires funding. Once the acquisition costs have been identified and it is known that for “one euro invested, there are five euros of revenue generated”, raising funds is more reassuring for investors.

5. Financing your internationalization

Finally, raising funds allows startups with big ambitions to export themselves. Indeed, the internationalization of a company requires very large sums of money, hence the need for new investors in the capital.

Thus, you understand why fundraising is essential for many startups. However, there are several startups that have succeeded in developing through self-financing.

6. You can scale faster

When you use bootstrap money or small loans here and there, you’ll eventually be able to launch. In the meantime, however, a competitor could enter the market and take your place and your market share. Traditionally slower forms of funding could mean a missed opportunity for your startup.

In contrast, venture capital typically provides a much larger initial cash infusion, allowing you to scale up to a more visible operation and add the talent needed to get the job done. This could mean the difference between a year and a few months. As a result, you can enter the market faster and before others in your niche.

The larger funding amounts, combined with a greater chance of additional funding in the future, make raising capital for your startup a wise choice.

7. You get assistance with risk and strategic direction.

Every startup can benefit from connecting with seasoned and experienced venture capitalists who understand risk, strategy, and tough decisions. With significant investment and return, venture capitalists are more than happy to step in and serve as advisors.

Many of these investors even enter a startup and become more active in helping guide their investment to success. This assistance can be beneficial when a startup founder lacks experience in areas such as marketing, financial management, and human resource management. Even the ability to help solve day-to-day problems or make difficult decisions can improve the overall experience of raising capital.

If you need coaching or guidance in your fundraising, please contact us.

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