What are the different types of investments for start-up companies?

23.10.2020

WHAT ARE THE DIFFERENT TYPES OF INVESTMENTS FOR START-UP COMPANIES?

If you have an idea for a business or have already started one, it is good to be aware of the financing options that are in front of you. These are the different types of investments that a company can receive:

Business Angels

This can be a group of people or more often a person (angel) who invests directly in new businesses at an early stage (startups). The amount of investment can vary from 20 thousand euros to 500 thousand euros, depending on the needs of the company. The funds they invest are personal. The business angel participates in the strategic management and active development of the start-up company. Guides and guides the entrepreneur.

Seed Startup Accelerator

Accelerators are start-up programs, most commonly in the technology, web and mobile sectors. They provide the teams with initial money to start with, help from mentors and partners and some of them - a job in an incubator. The initial cash investment they make varies from 20,000 euros to 50,000 euros. Some accelerators allow for the next round of investment up to 200 thousand euros (for example, the two Bulgarian accelerators LAUNCHub and Eleven). Usually the programs of most accelerators last 3 months.

Startup accelerators in Bulgaria: LAUNCHub and Eleven

Private Equity and Venture Capital Funds

These funds invest in companies with the potential to achieve rapid growth and sustainable competitive advantage. Venture and private equity funds participate in the company for a medium period of time (usually 5 years) and work with management to improve the competitive market position.

Venture Capital Funds and Private Equity Funds are often confused. Let's clarify the similarities and differences between them so that everyone is well informed.

(In the following lines we will call the Venture Capital Fund VC and the Private Equity Fund PE)

There is a difference between a Private Equity Fund and a Venture Capital Fund and it is:

  • VC invests in start-ups, while PE invests in already established companies that have been on the market for several years and have stable revenues;
  • VC makes a large number of risky investments to a lesser extent than PE (over € 1 million, below € 10 million) and it is clearly expected that not all companies will be successful, i.e. there will also be lost money. PE makes a small number, secure investments in a much larger amount (over 100 million euros).
  • VC aims to invest in companies that will grow at lightning speed in the next few years, PE invests in companies with already established and tested models, where growth in a short period of time is not so important.
  • One VC is focused on investing in the technology and biotechnology industries, while one PE invests in companies from all industries;
  • Both types of investors VC and PE are interested in private companies (those that are not on the stock exchange)

Fund of Funds

The Fund of Funds manages the funds of BGN 1.2 billion under four operational programs: OP “Human Resources Development”, OP “Innovation and Competitiveness”, OP “Environment” and OP “Growing Regions”. The main activity of the Fund of Funds is the structuring and management of financial instruments co-financed by the European Structural and Investment Funds during the programming period 2014-2020. Financial instruments are an alternative way of financing grants, which is becoming increasingly important in the European Union budget. Targeted at projects that could potentially become self-sustaining, they provide investment support through loans, guarantees or equity participation. In this way, business and public institutions are supported for economic development. Financial instruments allow for the return (recycling) of funds that can be reused.

A fund of funds selects financial intermediaries - banks, funds, credit and other financial institutions. In turn, the selected financial managers mobilize additional private capital and significantly increase the public resource, which through them reaches the final recipients.

All funds provided under the above-mentioned operational programs for financial instruments are combined into a common Fund of Funds, as the Fund Manager of Financial Instruments in Bulgaria EAD is the company that manages it.

The Acceleration and Initial Funding Fund of the Fund of Funds is implemented in accordance with the objectives of the Operational Program "Innovation and Competitiveness" 2014-2020, co-financed by the European Structural and Investment Funds. It aims to increase survival prospects for start-ups and support sustainable and knowledge-based business models.

The Acceleration and Initial Financing Fund is an instrument for equity and quasi-equity investment, which will support the creation and development of sustainable business models, as well as develop and improve the entrepreneurial ecosystem in Bulgaria. The funds from the Operational Program "Innovation and Competitiveness" for the financial instrument are EUR 51.3 million (BGN 100.3 million), which are divided into three funds:

  • Initial Phase I Acceleration and Financing Fund: EUR 14 million (BGN 27.4 million)
  • Initial Stage II Acceleration and Financing Fund: EUR 18.2 million (BGN 35.6 million)
  • Initial Financing Fund: EUR 19.1 million (BGN 37.4 million)

Fund managers will be required to supplement the resource of the three funds of the Acceleration and Initial Financing Fund with private capital, respectively up to 10% for the Initial Acceleration and Financing Funds and up to 30% for the Initial Financing Fund. The funds will be closed-ended and private funds will be provided at fund level and / or through co-investment at the final recipient level. The forms of investment could be equity instruments, namely shares, units, other transferable securities or equivalent rights or instruments that give a right to participate in the capital of a company. Funding in the company ranges from 25 thousand euros to 1 million euros.

The investment period is five years, and the duration of all three funds should be ten years, with the option to extend for two more one-year periods.

The Venture Capital Fund provides public funds for management in the amount of BGN 47.1 million from the Operational Program "Innovation and Competitiveness" 2014-2020, co-financed by the European Structural and Investment Funds. Applicants will also need to provide private co-financing amounting to a minimum of 30% of the total investment in final recipients. A fund of funds provides intermediaries with the opportunity to provide the necessary co-financing, both at the level of the fund and at the level of the final recipient, which gives flexibility to the fund manager in obtaining private resources. At the same time, a minimum amount of additional financing and support to companies is provided in order to fulfill their development and growth forecasts.

The funds are intended for equity and quasi-equity investments in high-tech, innovative small and medium-sized enterprises (SMEs) at an early stage of development. The amount of investments in each company will be in the range of 1.5 to 7 million levs. The purpose of the financial instrument is to support SMEs in the first five years after their establishment, as in this risky period a significant part of start-ups face difficulties to continue their activities due to lack of financial resources and effective management structure.

Specific for this investment fund are the additional strategic support and mentoring provided by the fund manager to the companies in which he invests.

Additional information: https://www.fmfib.bg/bg/buyer/procedure/25

The Municipal Guarantee Fund for Small and Medium Enterprises is a unique financial instrument, launched and developed by Sofia Municipality in support of business and innovation in one of the fastest growing capitals in Europe. Its mission is to increase the competitiveness and access to finance of SMEs in Sofia.

The fund aims to provide loan guarantees to SMEs that have a cost-effective project but cannot provide sufficient bank collateral. As of mid-2018, the Municipal Guarantee Fund has supported over 635 companies, assisting in granting loans of over BGN 117 million and a guarantee commitment of over BGN 31 million.

In 2018, the Fund launched the Innovative and Start-up Financing Program (FISP Program), which is a new guarantee scheme in addition to the successful Basic Guarantee Scheme implemented over the last ten years. The program for financing innovative and start-ups is a specialized guarantee scheme and was developed in implementation of the Innovation Strategy for Smart Specialization of Sofia (ISIS of Sofia). It is aimed at facilitating the access of start-ups and/or innovative enterprises to financial resources in connection with the implementation and development of their business projects.

In implementation of the Program, the Municipal Guarantee Fund will issue guarantees on loans granted by partner banks of the Fund for financing innovative business projects with emphasis on the main thematic priorities of the Innovation Strategy for Smart Specialization of Sofia, including:

Informatics and Information and Communication Technologies as one of the strategic focuses of ISIS of Sofia is to create the necessary prerequisites and conditions for Sofia to become a national and regional center for education, modern research, innovation and entrepreneurship based on ICT. The emphasis is on the following priorities: living in an intelligent urban environment and mobility; cyber-physical systems; future cloud technologies; future network solutions; healthcare and healthy lifestyle; protection of personal data, security and trust; intelligent energy systems and intelligent spaces.

New technologies in the creative and recreational industries will also be supported. Emphasis in this priority is to support the development of the creative economy in Sofia, which is becoming a major factor in the development of tourism. This includes the arts, cultural and creative industries, where the main factors in the creation process are individual creativity, skills, talent, as well as the ability to reproduce and protect copyright on the unique cultural element.

Parameters of the specialized guarantee scheme of the Municipal Guarantee Fund for small and medium enterprises

The main requirements for entrepreneurs are to meet the basic criteria for a start-up innovative enterprise:

  • Enterprise established not more than 3 years ago from the request for warranty support
  • Which provides or will provide innovative products, services and/or processes to the market
  • To meet the criteria for small and medium enterprises, according to the SME Act
  • The seat should be on the territory of Sofia Municipality or the business project should be implemented on the territory of the municipality;

Additional benefits will be given to:

  • projects of women entrepreneurs with completed educational qualification degree "Bachelor" in the field of the project;
  • projects of persons under 35 and persons over 50;
  • projects with social and ecological effect from the realization of the entrepreneurial innovative idea;
  • projects that create new jobs for the unemployed.

Permissible innovations

  • A product (good or service) innovation is a good or service that is new or significantly improved in terms of its properties or uses.
  • Production (process) innovation is a new or significantly improved way of production or delivery of the product;
  • Marketing innovation is a new method of marketing, including significant changes in the design or packaging of the product, its storage, advertising on the market or in determining its selling price;
  • Organizational innovation is a new organizational method in the commercial practice of the company, in the organization of workplaces or external relations.

Warranty coverage

The Municipal Guarantee Fund for Small and Medium Enterprises shares with the creditor bank part of the credit risk, securing up to 50% of the loan principal and up to a maximum amount of BGN 30,000, regardless of the principal amount of the loan. The guarantee is a supplementary collateral to the main collateral for the loan accepted by the Bank. The maximum amount within which the Municipal Guarantee Fund for small and medium enterprises will issue guarantees under this financial instrument is BGN 600 thousand.

Eligible collateral (individually or in combination)

All eligible collaterals according to the Bulgarian legislation are accepted as collateral for the loans. In addition to them, the Program for financing of innovative and start-up enterprises requires the owners of the loan applicants - legal entities and the owners of the collaterals to be engaged as co-debtors of the loan.

Mechanism for approval of the issuance of a guarantee by the Municipal Guarantee Fund for small and medium enterprises

The Municipal Guarantee Fund for Small and Medium Enterprises considers individually each individual project applying for guarantee support, and may accept or refuse to issue a guarantee, depending on whether the project meets the eligibility criteria under the Program for Financing Innovative and Start-up Enterprises and the Internal Rules of the Fund. More information: https://ogf-sofia.com/

Innovation Capital

This is a venture capital fund amounting to EUR 15.6 million with a mandate to provide access to capital and quasi-capital financing to Bulgarian start-ups. The fund aims to increase the survival prospects of start-ups with significant growth potential.

For contact: https://www.innovationcapital.bg/

Vitosha Venture Partners

Vitosha Venture Partners invests between 15,000 and 1,000,000 euros in early and growth companies that are based in or related to Bulgaria. The application form is available online at the following address: https://www.vitosha.vc/#5

Morningside Hill Venture Capital Fund

In November 2019, Morningside Hill launched its latest venture capital fund MORNINGSIDE HILL VENTURE CAPITAL FUND, which is focused on providing capital for growth of Bulgarian start-up companies. The fund has 28.6m euros under management. Apply electronically here: http://www.morningsidehill.com/

New Vision 3. (NV3)

New Vision 3 (NV3) is a fund for risky investments in technology companies at an early stage of development.

NV3 operates from Sofia and invests in fast-growing technology companies that seek to achieve leading positions in global and/or local markets. The main investor in NV3 is a Fund of Funds with funds amounting to EUR 19.1 million, provided by the Operational Program "Innovation and Competitiveness 2014-2020", co-financed by the European Structural and Investment Funds. You can contact New Vision 3 here: https://www.newvision3.com/copy-of-team

A.L.E.C.O (Achieve Leadership in Entrepreneurship and Cooperation Opportunities)

  1. L. E. C. O. is the first Bulgarian program of the European Union for entrepreneurial skills and unilateral exchange of young entrepreneurs from the EU. The program aims to send at least 120 young European entrepreneurs to Silicon Valley, Asia and Israel over the next two years to improve their entrepreneurial skills and build partnerships.

With a budget of up to 1m euros, up to 200 candidates from Bulgaria and across Europe will be supported. To benefit, they must have a viable business plan, have recently set up their own company or have participated in the Erasmus for Young Entrepreneurs program. More information: https://andreynovakov.eu/aleco/

Eleven

The Eleven Venture Investment Fund was established in 2012 with a start-up capital of EUR 12 million, provided by the European Investment Fund under the JEREMIE program. In addition to funding, Eleven offers workspace and preparation for startups from its portfolio. Additional information and contacts: https://www.11.me/

LAUNCHub Ventures

LAUNCHub Ventures is a leading early stage venture capital fund investing in technology start-ups in the Seed and Series A funding phases. The fund's website allows you to apply for funding entirely online at this address: https://launchub.typeform.com/to/O5vGva