Where to find growth finance for atechnology company?

Income financing, public financing, debt or venture capital? There are many options for the growth of a technology company. All of them have both advantages and disadvantages. This article will give you a comprehensive understanding of the different financial elements.

When a growth company begins to seek financing, the owners must first clarify their long-term goals. It is easier to find the right financing when the owner strategy is clear.

Different financing models have both advantages and disadvantages. These should be identified at an early stage and taken into account when deciding on the form of funding.

Income financing guarantees shareholder value

When a company is developed with the income from its activities, the money and therefore the decision-making power is in the hands of the owners. Therefore, in the development of activities, there is no need to listen to the advice of outsiders.

If a company grows with income, it does not need to dilute its shareholding. One of the most positive aspects of income financing is its shareholder value.

However, the company is often faced with the question of whether the money is sufficient for growth. If you are facing a resource-intensive innovation or a larger investment, it can be challenging to finance it with income funding alone.

Occasionally, operating on the basis of income financing can also take a long-established company out of the innovation cycle. The company may get stuck in a predictable, repetitive routine. In such a situation, a financial instrument can stimulate a steady stream of entrepreneurship and allow the entrepreneur to get out of his or her own bubble.

Advantages of income financing:

• Owner value
• Company in your own name
• No dilution

Disadvantages of income financing:

• Will the money be enough?
• Is the company innovating?

Growth through public funding

Public authorities also have different financing elements for the growth of a technology company. Funding is provided, for example, by Ely Centres, Business Finland, Finnvera, the EIF and the EU. They can typically provide support for research, loans for development projects and various loan guarantees.

Development funding can be applied for from the ELY Centre, while Business Finland can provide loans or support for a development project. Business Finland also supports research activities and the development of new services or products. For example, the EU can provide support for projects related to artificial intelligence or information security.

Loan guarantees are provided by sources such as Finnvera and the European Investment Fund. Recently, EIF loans in particular have become more common among technology companies. The EIF is a very cheap and efficient financial instrument which remains underused for some reason.

The EIF guarantees the loan to the bank, while the bank guarantees the loan to the company. The EIF has a lower annual guarantee fee than Finnvera's loans.

Applying for public funding can be challenging and time-consuming, especially for a first-timer, and the reporting requirements can seem daunting. A beginner entrepreneur is more successful if they get help from a more experienced expert who knows what they are doing. However, there are also self-serving “fake consultants” working in unethical ways who are worth avoiding.

Advantages of public financing:

• Money for development

Disadvantages of public financing:

• Application and reporting
• Beware of “Consultants”

Debt is an effective way to finance growth

Loan finance is available for growth companies in the form of traditional bank loans, overdraft facilities or invoice finance. A traditional bank loan is still an easy and effective way to finance the growth of a technology company without a lot of bureaucracy.

It is good to be aware that private equity investors also sometimes invest in the form of loans. Recently, it has become fashionable to pitch your business idea to a venture capitalist investor. 

Bank overdrafts are a cheap and underused financial instrument. If the company's equity is in order, an overdraft is an excellent and inexpensive way to finance small projects. These loans can also be covered by Finnvera or the EIF.

With an account limit, it is possible to obtain a loan of 1-1.5 months' turnover with a business guarantee. A loan can be obtained for 10% of the company's turnover. When assessing a loan application, banks use the previous year's results to make their decisions.

Invoices can also serve as financial security, and the interest rate is often reasonable.

When taking out any type of loan, it is worth bearing in mind the benefits and challenges of debt leverage. Debt leverage is not a problem when the business is doing well, things are rolling along and shareholder value is increasing. On the other hand, if the company does not do well, the loans must be paid off, and the shareholder value decreases.

When taking out a loan, you should be sure. You don't necessarily need to pledge your home as collateral for a loan, for example, but you often need to have some form of owner's guarantee.

Advantages of loan financing: 

• Leverage
• No dilution

Disadvantages of loan financing:

• Leverage
• Continuous payments
• Entrepreneur's guarantee
• Interest rates

Equity requires a clear ownership strategy

Equity as a form of financing is a broad topic. Sources of equity can include angel investors, private equity investors, stock market investors or FFFs (Family, friends and fools).

When starting a new company, it is good to think about the owner strategy properly. It is advisable to carefully consider how much of the new company you want to give to others. Inevitably, there is no point in rushing too quickly to distribute shares with the hope of getting rich fast.

Angel investing is an increasingly common form of financing in the technology sector. Business Angels, or Fiban, regularly organises pitching events through which you can participate in a funding round.

The good thing about angel investing is that one angel often brings other angels along to share the risk. At best, therefore, as part of this form of financing, you can get sparring from a very knowledgeable party. However, don't expect to get too much time from the angel, so it's best to keep realism as a part of the cooperation.

It is typical of venture capital that, within a certain period of time, the company collects money from investors and the investor receives a larger or smaller part of the company in return for his investment. During this period, the company will implement a development plan together with investors, after which an agreed exit will be known.

Stock market listing is the dream of many start-up entrepreneurs. After the great stock market boom, we are currently in a downturn, and the stock market window has closed for the time being.

A stock exchange listing can be a good solution for the visibility of a company. In addition, it is possible to make acquisitions with a company's share paper. A company's stock exchange listing also helps to attract skilled employees to the company.

When it comes to stock market financing, the requirements of investors should be taken into account in all activities. It is also good to be aware that the requirements of the Companies Act may be tightened, which will affect the way in which listed shares can be bought and sold.

Advantages of equity: 

• Enough money
• Risk-sharing

Disadvantages of equity: 

• Dilution
• Requirements of investors

A specialised minority investor can jump in later

The types of venture capitalists can be divided into three categories: Venture Capital, Growth Capital and Buyout.

Venture capital invests in start-ups as a minority investor, growth capital also acts as a minority investor but for established scale-ups rather than start-ups, and buyout financing is a majority investor investing for a successful exit.

A minority investor can jump in at a later stage to finance the growth of a technology company: at the point when the company is already in more secure waters and it is obvious that it is worth putting money into the company. 

A minority investor can be an investor who specialises in a particular topic. When considering working with a minority investor, it's worth finding out what the venture capitalist specialises in, so that working together goes smoothly.

Voland Partners is a responsible minority investor specialising in the technology sector. We invest extensively in Finnish technology companies and become co-entrepreneurs to create value together with the entrepreneur.

In addition to funding, the benefit for the entrepreneur is sharing the risk and getting a professional entrepreneurial partner in pursuit of growth. We are on the same side of the table, which means that we plan and implement value creation together. With Voland, the likelihood of success increases, and the entrepreneur avoids many pitfalls.

Advantages of minority investment:

• Money
• Support from professionals
• Exit plan

Disadvantages of minority investment

• Dilution
• Requirements of investors