For startups, access to capital and strategic partners is crucial to growing and succeeding in a competitive market.
This article provides an overview of the advantages and disadvantages of public and private financing. You will also gain insight into how a well-designed capital strategy can ensure sustainable growth for your company. The content is inspired by the ESSE masterclass “Financing and Grants,” recently held by Theis Helseth from Esacon .
Public support schemes: support for innovation and social benefit
Norway offers a number of public support schemes through, among others, Innovation Norway and the Research Council of Norway . County municipalities can also offer support schemes, and several of Aggrator's companies have received public support from Akershus County Municipality .
Advantages of public funds:
- Risk reduction: Public support schemes reduce financial risk and can thus make it easier for startups to focus on their core business and growth. Public support can also attract further capital from private players, as the support shows that the project is considered to be economically valuable.
- Maintain ownership and control: Unlike private investments, public funding involves no ownership sharing, allowing the founders to maintain control of the company.
- Long-term perspective: Public schemes do not have the same requirements for quick returns (ROI, return on investment), which gives companies the peace of mind to develop products and solutions without pressure.
Disadvantages of public funds:
- Time-consuming processes: Application processes can be time-consuming and often require detailed documentation and follow-up. This can strain resources, especially for small businesses.
- Competition and requirements: Public funding schemes often have specific criteria that can limit access. It is therefore important to read carefully what is required and consider how the project can be presented to meet the criteria.
Private investments: capital and expertise
Private early-stage investors, such as angels, pre-seed and seed funds, and venture capitalists offer more than just capital. They also bring expertise, networks, and strategic guidance, which can be crucial to a company's development and growth.
Advantages of private investments:
- Expertise and networks: Private investors often provide valuable advice and access to industry networks, which can accelerate growth by opening doors to new markets and partners.
- Flexibility and room for maneuver: Private investors often offer convertible loans and andre flexible financing forms that give the company adapted access to capital, especially in the start-up phase. Capital from private investors also has the advantage that it can be reallocated if new needs or opportunities arise, which gives the company greater room for maneuver in a dynamic development process.
- Facilitating rapid growth: Private investments can provide rapid access to larger amounts of capital, enabling expansion and product development at a faster pace than with public support alone.
Disadvantages of private investment:
- Dilution of ownership: Private investments often require the founders to give up some of their ownership, which can reduce their control over the company's direction.
- Shorter time horizon and return requirements: Private investors typically expect a faster return, which can put pressure on the company's growth strategy and can lead to short-term decisions that do not always support long-term goals.
Hybrid financing
For many startups, a hybrid financing model – a combination of public support and private investment – may be the optimal solution. Public funds can provide stability and reduce risk, while private investment adds growth capital and expertise.
Advantages of hybrid financing:
- Stability and flexibility: Public funds provide seed funding that can reduce early-stage risk, while private investments provide flexibility to expand and meet market needs.
- Sustainable growth: A hybrid model facilitates long-term growth that balances financial returns with social value, which is especially important for companies focused on both sustainability and innovation.
Typical pitfalls
Many startups make early mistakes that can create challenges in later funding rounds. For example, excessive dilution of ownership in early stages can result in a “broken cap table,” where the founders have lost incentive to continue growing, and investors may become skeptical about investing in the company. A capital strategy without clear milestones can also lead to inefficient capital use and hinder further growth.
Tips for avoiding pitfalls:
- Limit the number of passive investors: A high number of passive owners can create a confusing ownership structure, which can make the company less attractive to future investors. An effective solution may be to gather smaller investors in a holding company, so that they appear as a single investor on the cap table.
- Think long-term: Consider how ownership and financing will affect the company in later stages, and create a strategy that supports both short-term and long-term growth.
- Use financing instruments strategically: Convertible loans and SLIP agreements are flexible, but must be used with caution to avoid unexpected dilution effects or challenges in later rounds.
- Choosing funding based on ease of access: It can be tempting to choose the easiest source of funding to access, whether it is public support or private funds. This is particularly relevant for activities outside the core business, which can help keep the company afloat. However, it is important to be aware that such funding can become a distraction from the company’s overall goal. Always ensure that such activities have a strategic link to the company’s long-term ambitions.
A strategic capital plan for sustained growth
Developing a solid capital strategy is essential for startups seeking long-term success. A good strategy should be milestone-based, focus on de-risking, and ensure that the company maintains control over its own development.
By combining public support schemes with private investments, and ensuring that the capital raising supports the company's overall vision and growth ambitions, startups can build a robust platform for growth and competitiveness.
Hos Aggrator står vi klare til å støtte deg i å finne riktig finansiering og utvikle en strategi som er tilpasset din bedrifts behov. Ta kontakt med oss for å lære mer om hvordan vi kan bidra på din vekstreise.