The Emergence of Start-ups

David Heller, Sylvain de Chadirac, Lana Halaoui, Camille Jouvet

• Publisher: Wiley-ISTE
• Year: 2019
• Print ISBN: 9781786304506
• eBook ISBN: 9781119618416
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Kleinbetrieb

In France, the number of young start-ups has soared since the beginning of the 2010s, leading the government to encourage their development and make France the "start-up nation". This book contributes to a better understanding of the emergence of these companies by studying the influence of the ecosystem on their development and the modes of financing that they use. The financing of start-ups remains a major challenge insofar as they are often faced with refusal from the banks. Successful financing depends largely on the geopolitical and economic environment. Through a comparative study of models from both France and English-speaking countries, the authors explore possible financing solutions for France. The book concludes with a discussion of equity crowdfunding, which proves to be a successful financing alternative. Including theoretical and empirical studies, this book provides concrete solutions aimed at developing innovative entrepreneurship in France.

1
The Influence of the Ecosystem on the Development and Financing of Start-ups

The key point that differentiates start-ups from SMEs (small and medium-sized enterprises) is the recurring need for financing. In this context, the environment in which the young company operates is predominant in terms of its geopolitical and economic aspects. Start-ups are companies with rapid growth that remain fragile and dependent on human, legal, tax and financial factors. The most successful start-ups come mainly from Western countries. It therefore seems interesting to conduct a comparative study with developing countries to understand the key success factors. This leads us to the following question: how does the geopolitical and economic environment favor the financing of start-ups?

First, we will review the literature on the financing processes and key success factors of start-ups around the world. A cross-analysis between two socio-economic contexts will be carried out to differentiate the two study parameters.

Then, we look at the levers available to promote the financing of start-ups: tax or through government policies, initially, then according to human and geopolitical factors. Finally, we look at the impact of the digital revolution, which is totally changing the modes of communication and operation and thus modifying start-ups and their financing methods.

Finally, through a field study with professionals in the sector, we will study how start-ups adapt to the environment and how financing solutions follow the path of the digital revolution.

1.1. Contextual framework: the needs and challenges of start-ups

The objective of this first part is to understand the evolution of young innovative companies and their specificities in terms of development and financing through different social economic contexts.

1.1.1. The start-up, a 21st-Century initiative

The meaning of the term start-up has not changed since its emergence at the beginning of the 20th Century. On the other hand, in the 21st Century, the number of companies referred to by this term has increased significantly. Also, economic theories show how start-ups are a major issue today.

1.1.1.1. The characteristics of start-ups

In France, the first investments for new white coal companies were made between 1920 and 1928. These are the first speculations for these new companies. On Wall Street, the movement was even earlier, in 1912, with radiomania¹. Many start-ups taking advantage of technological advances in financial services technology (FST) have been able to receive significant investments to finance their development. The example of Hewlett-Packard (HP), which was founded in 1939 in a Californian garage, shows that, very early on, enthusiasm for these initiatives was significant.

The term gained significant popularity in the late 1990s with the emergence of small start-ups linked to information and communication technologies, promising huge profits. These start-ups, now known as GAFAs² (for Google, Apple, Facebook and Amazon), are now web giants who dominate their market and have a particularly important place in society. (Facebook has more than two billion users.)

Today, the sectors that are most attractive are services, communication (including social networks), on-demand services, health (biotechnology, nanotechnology and other MedTechs³), information, e-commerce, but especially Big Data and artificial intelligence technologies. They are home to some of the 15 start-ups with a value of at least $1 billion.

Start-ups appear to be the future of entrepreneurship and offer benefits for both entrepreneurs and investors, as well as for innovation in a broader sense. Start-ups alone represent the race to modernization and innovation.

On the other hand, the context in which these structures are created is a direct component of their success. Bill Gross Entrepreneo (2016), a multi-entrepreneur and American financier, agrees that the criteria for a start-up’s success vary according to the project, but certain criteria are essential:

• – the idea or concept and the need it addresses;
• – the team that will carry out the objectives and the ability to find the necessary skills;
• – the business model to make investments profitable;
• – financing to support its development and the cost of development;
• – the timing of the market.

Patrick Fridenson, a business historian and director of studies at the École des Hautes Études en Sciences Sociales, characterizes a start-up as a company with very strong growth, using new technology, targeting a new market with strong potential and meeting a significant financing need, hence the call for fundraising.

This last point is the central issue of a start-up, which faces significant financing needs to support its development and growth. Turning to external funders is a necessary step for all these structures. Fortunately, the proposed alternatives to these structures have multiplied and now allow a large number of projects to deal with these problems.

1.1.1.2. Financing motivations and theories of young innovative companies

The choice of investments in start-ups is made according to many criteria:

• – Profitability and liquidity risk: for venture capital investments, after analyzing the project, the market and the team, experienced investors pay particular attention to the exit scenario envisaged by project leaders. The exit is the only way to make the investment profitable. These routes are mainly:
  • - industrial transfer,
  • - initial public offering (IPO),
  • - sale of shares to historical shareholders,
  • - sale to new investors.

Only transfers to an industrial company or initial public offerings make it possible to make significant profitability multiples. Analysis of the market situation, as well as the presence of both powerful industrialists, and the evaluation of the zone stock market power are an essential element. Geopolitics is therefore central to the decision.

• – Financial projection, value proposition and market potential: this takes into account the nature of the investment, the time required to reach break-even point, the company’s level of development and the maturity of the fundraising (ability to already have guaranteed investments). It is essential that the project has clear financial data, i...

Table of contents

• Cover
• Table of Contents
• Introduction
• 1 The Influence of the Ecosystem on the Development and Financing of Start-ups
• 2 Financing Young Innovative Companies in France
• 3 Equity Crowdfunding of Start-ups in France
• Conclusion
• References
• Index
• End User License Agreement