Structured Financing requires synchronizing potential funding rounds with the key technical and commercial milestones of its development.
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| Structured Financing A Tool for Startup Creation and Growth |
This task is particularly challenging due to the lack of historical data and the focus on a promising yet risky future.
Startups must juggle various resources, such as capital, repayable advances, and grants, to support rapid growth, often characterized by negative operating results.
As the startup evolves, its financing needs become more sophisticated, incorporating structured finance mechanisms that align with the startup’s growth trajectory and exit strategies.
The Challenge of Financing a Startup
Financing a startup involves aligning funding rounds with its critical developmental phases. This financial exercise is particularly challenging because startups lack a historical track record and only have a potentially promising future.
Although launching a startup differs from large industrial or infrastructure projects, the complexity of its financing plan brings it closer to structured financing.
Structured financing involves using various financial engineering tools to manage cash flows and shape the balance sheet’s liquidity structure. These solutions address financing challenges not covered by self-financing or traditional loans.
Financial Challenges in Line with Rapid Growth
The inherent nature of startups is rapid growth, which increases pressure on investments, operating results—often negative for several years—and working capital requirements (WCR).
At the inception of a startup, few assets can be offered as collateral for potential bank financing. Entrepreneurs must therefore rely on other resources to launch and grow their businesses.
In addition to margins from initial sales, startups need to mobilize a mix of new capital, repayable advances, grants, and other public support, such as the Research Tax Credit (CIR).
Risk Sharing and Future Gains
Potential private investors (business angels, seed funds, and venture capital funds) take on the risk of technical or commercial failure in exchange for significant equity in the newly created company—provided that the prospect of substantial gains outweighs the high probability of total loss.
This primarily financial logic is often accompanied by an expectation of social and/or environmental value creation for impact investors.
The state (i.e., the public sector) often plays a role in balancing these inherently risky financing plans through various grant programs, repayable advances, tax credits, and contributions to seed and/or technological venture capital funds.
Some entrepreneurs also manage to involve strategic partners in closing their financing plan, for example, through pre-financing from future clients or key suppliers in exchange for time-limited and geographically restricted exclusivity agreements.
A Growing Array of Financing Tools
While early-stage startup financing may not initially match the complexity of structured financing mechanisms typical of large industrial or infrastructure projects, developing genuine financial expertise is essential to model your financing needs and secure appropriate resources.
This search for financing goes beyond simply optimizing your Weighted Average Cost of Capital (WACC), which can spark endless debates when discounting future operational cash flows.
At the startup phase, the primary challenge is to mobilize high-level expertise to execute accelerated de-risking strategies, both technically and commercially, which is a hallmark of startups. Investor confidence will largely depend on the quality of the startup’s team.
Your ability to achieve technical and commercial objectives without significant budget or schedule overruns will enhance your credibility and ability to attract new funding.
Once a startup has moved beyond the seed stage, technological risk gives way to commercial and execution risk. The company’s development then requires more professional management, often less intuitive than at the start. This phase, usually accompanied by greater financial visibility, opens up new, more sophisticated financing mechanisms for the startup’s leaders.
Exits via LBO: Another Form of Structured Financing
While most startup exits involve selling the company to major industry players, some companies ensure liquidity for their equity investors through Leveraged Buy-Outs (LBOs), a structured financing method widely used in one of the most dynamic segments of private equity.
However, these interventions are reserved for a minority of companies that have successfully grown to generate significant cash flows, enabling a holding company to repay acquisition debt and secure substantial returns for new investors who replace the previous ones.
The future cash flows of the acquired company are then used to back a multi-tiered debt structure: senior, mezzanine, and junior debt.
Thus, financing startups at different stages of their existence is akin to artisanal craftsmanship, extending beyond the technological and commercial feats required for their creation and growth. This necessitates that startups develop strong financial expertise within their teams or with the help of advisors.