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The challenge for young innovative companies is to mobilize talents and scarce assets while having limited resources. Your ability to generate a substantial operating cash surplus and mobilize other sources of funding is crucial, encouraging a focus on high-margin activities with reduced working capital needs. Selling non-strategic assets can be a source of exceptional proceeds, while grants and debt utilization will be constrained by your equity. Lastly, even though capital injections are virtually limitless, bringing in investors requires a balance between realism, ambition, and sharing power, gains, and/or future profits.
E. Krieger
The paradoxical challenge for a young innovative company is to « surround itself with the best » while often lacking the means to remunerate them. The ability to mobilize talents and scarce assets to build a foundation of technical and commercial credibility conditions, if not your survival, at least the pace of your development.
Money is not everything, far from it, but your strategic and operational maneuvering room is strongly influenced by your cash flow and your ability to mobilize funds, through your current operations and/or other channels.
Returning to the fundamentals and analyzing your financial leeway in the creation and development phase of a startup, let’s start with a financial flows table.
In the beginning, there was cash
The contributions of co-founders are often limited: the vast majority range from 1 to 20k€, with the upper range allowing for the solicitation of innovation grants of equivalent amounts.
This available cash is a starting point that allows many companies to develop through self-financing and finance their organic growth… provided they generate sufficient operating cash surpluses.
Being profitable on a purely accounting level is not enough, however, as payment delays from your customers can absorb your entire operating margin, especially if your sales are growing at a rapid pace.
What is called Operating Cash Surplus (OCS) is the difference between your cashed operating revenues and your disbursed operating expenses. It is, therefore, the difference between your EBITDA and the variation in your Working Capital Requirement.
Prioritize high-margin activities with reduced or negative Working Capital Requirement (WCR)
You are not meant to « be your clients’ bank » … unless you are a bank yourself. In short, if your value proposition is significant, it should be reflected in your operating margins (EBITDA) but also in your WCR.
We sometimes encounter industrial gems whose accounts receivable are close to zero, and whose inventory exists only to serve buyers who pay a premium for their products.
Some companies even manage to start with advance payments of several hundred thousand Euros from clients or strategic partners for whom you represent a Trojan horse to develop a new business.
These high-margin activities with negative WCR will allow you to invest in advance and even diversify.
Sell non-strategic assets
Unlike the SME executive who resigned to sell a Ferrari Roma acquired « to develop an events business, » a young innovative company may not have such assets, but it is sometimes possible to sell non-strategic assets that can generate exceptional proceeds.
These divestments may involve « non-essential » brands or patents. For example, a young company that had filed a European trademark to launch a newsletter related to an IT activity was offered several hundred thousand Euros by a multinational that wanted to capitalize on this label.
Selling a non-strategic activity or motivated by « an offer you can’t refuse » can also represent a considerable gain. For instance, Xiring, a provider of security solutions for electronic transactions, sold its Banking division through a « business sale » for €20 million, allowing it to develop its Health division.
Grants and debts are limited by your equity
Your company can naturally seek grants and repayable advances, especially if it develops innovative products or processes supported at the national or European level for competitiveness and industrial sovereignty reasons.
However, like bank loans, which will additionally require guarantees that a young innovative company may struggle to provide, these various grants or banking assistance will be limited by the level of your equity… which brings us to the last part of this synthetic overview of the financial leeway of a young innovative company.
Capital is quasi-unlimited… but very expensive!
Self-financing growth is possible for a young innovative company, provided you have a considerable value proposition and genuine negotiation skills. But the amounts required to finance R&D may force you into a « service mode » development that is incompatible with the deadlines and amounts needed to develop your products.
That’s why you have the option to open your capital to external investors if you can demonstrate outstanding development prospects, driven by an elite team addressing a market worth several hundred million Euros.
These capital injections are virtually limitless, as demonstrated by the €490 million raised by Mistral AI less than 6 months after its creation, but this almost mathematically constrains you to create a company value ten times higher than the capital raised from venture capital funds.
The financial development of a young innovative company is, therefore, a combination of realism, ambition, and a willingness to share control as well as future gains or profits with third parties.
