Business Capgemini

What is the start-up equity conundrum?

Author

Dan Matthews

January 31, 2017

The start-up phase of any business represents a thrilling ride for its founders. From getting a team together, finalizing the details of the business plan and generating early sales, there are few more exciting ventures you can embark upon.

But people involved in start-ups everywhere have a common challenge which sometimes holds back progress: locating and securing appropriate funding for growth.

Unlike large, established organizations with long track records, a start-up has little evidence that it can pay back a loan or justify investment from a third party. It can’t point to recent trading figures or illustrate a precedent for paying off a debt.

This makes it a tricky prospect to locate people and institutions prepared to back an idea financially. Even a modest bank loan requires a large amount of preparation and a proposal backed with evidence-based predictions of future growth.

Many start-up founders rely on family and friends for early funding, perhaps a loan from a family member or even money from remortgaging a property. But these routes present their own risks, which could lead to added stress, extra personal risk, and even the break down of relationships.

Small businesses in certain industries can apply for grant funding, especially if they are serving a public good or aim to solve a problem that is sapping taxpayer money, but grants are hard to win and many businesses won’t qualify for the strict terms and conditions associated with this type of funding.           

A mixed funding picture for new businesses

The UK is one of the best places in the world win start-up funding, but much of the money is concentrated in hot industries such as fintech. Although billions of pounds are plowed into start-ups each year, large chunks of that money go to businesses that are tipped to quickly become vast organizations with a global customer base.

Not only this, but more than half of the money is directed towards businesses based in London’s entrepreneurial hotbeds such as Silicon Roundabout, which home to a cluster of billion-dollar “unicorn” start-ups. It’s not great news if you are based in one of the UK’s other thriving cities or even beyond.

As if locating funding wasn’t tough enough, start-ups face another perennial problem when it comes to securing forms of equity funding. Business angels and venture capital institutions — who invest in return for equity — steer clear of all but the most promising new businesses because of the perceived risk of investing in them. 

Without a track record or a lot of commercial activity to draw from, investors must act on the merit of the idea and an appraisal of the management team. Because they can’t expect to see their money again, investors will ask for a large slice of any start-up they invest in.

Businesses resorting to equity funding can therefore expect to cede a much bigger percentage of their equity than they would if they were bigger and more established, with lots of sales already achieved.

It’s a trying situation for any start-up and potentially a strain on founders before they even get going.

A solution to the start-up investment problem

But there are alternatives. As Capgemini turns 50 years-old, it is celebrating with a race to find today’s most exciting start-ups. The InnovatorsRace50 is a competition giving the founders of start-ups the opportunity to win $50,000 each in equity-free funding.

Candidates submit applications online and generate support for their businesses via online voting. Applications are open until 28 February. In March, a long-list of 50 businesses will be selected via online voting, a jury of experts and Capgemini executives.

After in-depth interviews, a short-list of 10 finalists will be selected in April. These will get access to Capgemini’s Applied Innovation Exchange experts. Five winners of $50,000 funding each will be announced on 5 October.

For more information, visit the InnovatorsRace50 website and register.

 

By Dan Matthews

Dan Matthews is a London-based journalist writing for the UK broadsheet press. He is also the author of ‘The New Rules of Business’, a book revealing the secrets of a range of entrepreneurs, and founder of the news website Minutehack.com. Titles he has written for include The Daily Telegraph, The Times, Raconteur Media, The Financial Times, The Guardian, Real Business Magazine and The Marketer. 

 

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