Follow-On Financing Of Business Angel Backed Companies. "Choices and Sources: Debt vs Equity (Business Angels vs Venture Capitals)"

Abstract: Entrepreneurial Companies play a fundamental role in economic growth, the creation of employment, local and regional development, and social cohesion. Start-ups will not necessarily become the largest source for employment, but they are considered economic drivers that commercialize innovation, expand internationally and create economic value. With the recent increase in prominence of new entrepreneurial ventures all over the world, much attention has been devoted to the creation of new firms. Belgium consists of three main regions: Brussels, Flanders, and Wallonia. The breakdown of start-ups according to these regions is the following: Brussels: 31.5%, Flanders: 53.4%, and Wallonia: 15.1%. Note that Brussels, despite hosting only 11% of all active companies in Belgium, is doing exceptionally well regarding its share of start-ups and scaleups; almost 50% of all Belgian start-ups are concentrated in and around the cities of Brussels, Ghent, and Antwerp. It is no surprise that, being the largest cities of Belgium, students make up for a significant portion of the population. More than half of the companies are active in the following categories: eCommerce, Software as a Service (SaaS), consumer mobile/web applications, industrial technology/production, and education. Half of the companies are at the start-up stage (i.e. completion of MVP or initial customers/revenue). 22% is in the seed stage and 24% in growth stage - 85% of the companies are mainly in B2B. While the majority (55%) of entrepreneurs believe that their product or service is a novelty in the world, only 4% realizes that their product or service is not a market innovation. In addition to that, 23% of startups do not have employees (Mohout, 2016). The supplying side of the market for informal capital consists of high net-worth individuals with considerable business experience, commonly known as Business Angels (BAs). Business Angels invest a portion of their wealth in high-risk, high-return start-ups (Coveney & Moore, Business Angels: Securing Start-up Finance, 1998). While it is difficult to precisely quantify the size of the angel market (due to its informal nature), some studies estimate its size to be twice the size of the institutional venture capital market (Freear, Sohl, & Wetzel, 1995). This suggests that Business Angels provide the largest amount of capital among early-stage ventures and fund a greater number of firms than venture capitalists (VCs) do. After receiving a first investment from a Business Angel, start-ups face a new critical question: whether to raise new funding under the form of debt or equity and, in the case of equity, involving new Business Angels or migrating to Venture Capital. Literature suggests that these young enterprises more often than not receive funds from equity in the early stages. However, in the case of demand for more resources and having a BA as back up, the entrepreneur may appeal to traditional financing sources in order to maintain the ownership. Resumen: Las microempresas juegan un rol fundamental en el crecimiento económico de un país, la creación de nuevos empleos y el desarrollo local y regional. Start-ups no se convierten necesariamente en la mayor fuente de empleo pero si son considerados impulsadores económicos que comercializan innovación, se expanden internacionalmente y crean valor económico. Después de recibir una primera inversión de un Ángel Inversionista, Start-Ups tienen que enfrentar una nueva y critica pregunta: ¿es mejor conseguir nuevos fondos adquiriendo una deuda o nuevo capital proveniente de inversionistas y en caso de recurrir a inversionistas, conseguir un nuevo ángel inversionista o migrar a un fondo de inversión? La literatura sugiere que estas nuevas empresas a menudo reciben fondos de capital en las primeras etapas de inversión. Sin embargo, teniendo un Ángel inversionista como respaldo, el empresario puede optar por métodos de financiación más tradicionales con la intensión de mantener propia la empresa