A fundraising is defined as a capital increase carried out by an unlisted company. The companies raising funds are generally start-ups and their financing comes mainly from an injection of capital from investors, since their nascent status does not yet give them easy access to bank or market debt. Unlisted small and medium-sized enterprises (SMEs) and SMIs, as well as special purpose vehicles (SPVs) that have been created to carry out a specific project, can also approach private equity investors for funds.
Characteristics of fundraising operations
The nature of the private investors who take part in a fundraising varies according to the maturity of the company in which they invest:
- the founder, his family and friends generally participate in the initial stage of the project. This is sometimes referred to as “love money”;
- Business angels (individuals or investment clubs) may participate in the first round of structured fundraising. This so-called seed money is sought by companies looking to finalize the technological development of their service/product or to build up their commercial structure;
- Venture capital (VC) funds are financial entities or funds sponsored by a large company (Corporate Venture Capital, or CVC). They can join – alone or in combination with others – in subsequent fundraising rounds (series A, B, C, etc.) to accelerate the company's development and internationalization.
The capital instruments issued by the company in the context of a fundraising range from convertible bonds to ordinary shares – including preference shares, which give their holder specific prerogatives in terms of voting rights or dividend entitlements. The structuring of these instruments is very flexible insofar as the operation is carried out in a private setting.
The size of the fundraising can range from tens of thousands of euros to several hundred million. Once the resources of this market have been exhausted, companies generally turn to the stock market to raise capital. A subsequent IPO provides fresh liquidity to the initial private investors.
The raising of funds is generally accompanied by the signature of a shareholders' agreement and the setting up of governance bodies (strategic committees) that allow investors to be associated with the company's structuring decisions. Shareholder agreements spell out the rights conferred to the investors, the functioning of the governance of the company, and the organization of the liquidity for the investors.
Role of the bank
The bank that accompanies a fundraising has an advisory role in the structuring and calibration of the operation; the valuation of the company; and the preparation of marketing and other documentation). It is also in charge of researching potential investors and negotiating the conditions of their entry into the company's capital.
The transactions are carried out by the banks' M&A teams or by M&A boutiques specialized in this type of transaction.
In 2020, the volume of innovation capital funds raised in France amounted to €2.2 billion. (Source: France Invest activity report)