INVESTMENT IN YOUNG COMPANIES: STAGES OF MATURITY AND FINANCING MODALITIES

Lately, it has been increasingly common to hear cases of traditional companies, with many years of history and with products known worldwide, losing the market, admiration of customers and even employees to small, newly established companies, but with great capacity for innovation and growth potential. This dynamic, accelerating day by day, has made terms such as StartupYes, Venture Capital and Seed Money more present in everyday corporate life. Every company, without exception, from the beginning of its activities, will require capital to develop new products, hire good employees, invest in industrial plants and, finally, grow. Depending on the stage of maturity at which the company is at, entrepreneurs have access to different sources of financing to help them overcome the various challenges that exist in building a successful company. The purpose of this article is to present the various phases of a company's life cycle, from its creation to its maturation, presenting the main characteristics and peculiarities of each stage of this journey, as well as the most appropriate financing modalities. The main stages of the growth process of a Companies are:

• Seed Stage: refers to early-stage companies, with the value proposition still under development. At this stage, the company is usually composed only of entrepreneurs, who dedicate time and energy to designing their product or service, understanding the market, and making first contacts with potential customers and suppliers. Companies in Seed Stage are financed by the entrepreneurs themselves and, in some cases, are assisted by incubation and pre-acceleration programs.
• Early Stage: at this stage companies already have their value proposition well established and a pre-defined business model. It is common to already have an MVP (Minimum Viable Product), that is, a product not yet finished, but already ready enough to be used by a small number of potential customers. Companies in Early Stage they require capital to complete product development and start commercial activities. The main forms of financing at this stage are Angel Investors and Seed Capital funds.

• Growth Stage: stage in which the company definitely enters the market, already with a finished product and a defined commercial model, after having made a small amount of sales to a small number of customers. At this stage, companies are focused on Traction, that is, to rapidly increase the number of people using your products or services. Companies in Growth Stage they require capital to hire good professionals, expand investments in marketing and create areas of relationship with clients. Funds from Venture Capital they commonly search for companies at this stage to invest in.
• Late Stage: well-known companies in the market, with established products and a solid base of partners and clients. Although there are segments where companies in Late Stage they still have high growth potential, generally at this stage companies are less focused on growing at any cost and more dedicated to improving internal processes, operational efficiency and cash generation.

As seen in the illustration above, companies in the early stages of maturation, although they have greater difficulty obtaining financing, are those with the lowest need for capital, due to their small size. Another highlight is that risks for funders decrease as the company develops. The different types of risks inherent to each maturity stage attract investors with different profiles. The newer the company, the more risk-prone its investors are. The main types of investors in young companies are:

• Angel Investor: the Angel Investor is generally an individual who has accumulated capital through a successful entrepreneurial or executive trajectory. This investor profile, in addition to providing financial capital to the company, is interested in supporting the entrepreneur with previous experiences and his network of relationships. According to Anjos do Brasil, an organization dedicated to fostering the growth of this type of financing, Angel Investing in a company is normally carried out by a group of two to five individuals, both for risk dilution and for the sharing of dedication. The amount financed by this investor profile generally ranges from R$ 200,000 to R$ 500 thousand, and may, in some cases, amount to R$ 1 million.
• Seed Capital (Seed Capital): they are funds or investment firms, managed by professionals dedicated to finding opportunities and managing the portfolio of invested companies. The capital of these entities usually comes from development banks (such as BNDES, BDMG or BNB) and development agencies. Investments vary between R$ 500 thousand and R$ 2 million in Brazil.
• Venture Capital (VC): spite Venture Capital To be the correct term to describe all classes of venture investors, it is common to use VC as a form of investment in small and medium-sized companies, with high growth potential, in a phase of market traction and an increase in the customer base. Investments in Venture Capital are generally carried out through investment funds, which require greater corporate governance and transparency. Investments vary between R$ 2 million and R$ 10 million in Brazil. VC funds usually acquire a minority share of companies, with the main objective of helping them to expand and reach their maximum potential in a short period of time, in order to achieve a good return on capital for their shareholders.
• Private Equity: O Private Equity It is an investment modality in which a Resource Manager acquires a significant share in a company, with the objective of accelerating growth, professionalizing management and expanding the generation of value for it. As in VC, the Manager of Private Equity its main objective is to generate the highest possible return for its shareholders. Generally, the background of Private Equity carries out several mergers and acquisitions involving large companies, which normally earn more than R$ 100 million annually. Currently, for example, Pátria Investimentos, one of the country's leading Private Equity Managers, is consolidating the Ophthalmic Clinics segment, through the acquisition of several Players of the segment. At this stage, investments involve amounts much larger than R$ 10 million in VC, and that is why investors prefer publicly traded companies or companies about to go public.

Identifying the appropriate investor profile to finance the activities of young companies is fundamental to their success. Although these funders are, in general, able to contribute to the growth of their investments, it is important for the entrepreneur to carry out a diligent and structured investor selection process, thus avoiding future misalignments and disagreements.

Article written by Lucas Della-Sávia - Partner of FC Partners

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