Unlike other small businesses, start-ups are financed from the outset by equity investments, not by credit. The seed stage comes first, in which the entrepreneurs try to finance their companies themselves, either with cash or cash equivalents (working at night and on weekends while holding down salaried jobs), or with the help of family and friends, who are usually close to the entrepreneurs and believe in the concept. The investments are usually small, amounting to tens of thousands of dollars.
In the subsequent seed stage, when a concept has been formulated and there is even initial work on a product, wealthy private investors (angels) enter the picture. Some of them are professionals who invest in startups as a matter of routine, and others are people who have learned about a particular venture, are enthusiastic about the concept, and decide to invest. The investment amounts usually amount to a few hundred thousand dollars.
After several months to a year, and if the venture progresses, the entrepreneurs seek to raise larger amounts in Round A financing. This financing round totals a few million dollars, and may reach $10 million. Subsequently, as the company progresses, additional financing rounds (Round B and C) are held from venture capital funds and strategic investors. The use of substantial credit (beyond credit cards and short-term credit in small amounts) only occurs when the company reaches the stage of several million dollars in revenue, or Round B or later financing.
An exception is venture debt or venture lending instruments, which are extended as medium-term loans in which a small part of the compensation is in shares. This kind of financing also usually occurs in the later stages; specialized funds, which are used to taking risks, are involved in the earlier and riskier stages. Banks are not.
What is the role of a commercial bank in the life of a start-up? In my view, the bank should provide essential basic business tools, such as opening an account, granting credit cards, and routine financial advice, while taking care to offer outstanding service with a minimum of disruption to the start-up’s activity.
The intensive work environment in which the entrepreneurs work in start-ups leaves little room for mediocre, slow, or bureaucratic service. Offering full work through the bank’s app, without the need for daily contact with the branch, is an example. It is also possible and necessary to develop derivatives of the tools to meet the special needs of start-ups. For example, Poalim Hi Tech has been offering special credit cards with special benefits for start-ups for quite some time. Lately, we have seen other banks jump on this bandwagon. The possibility of providing bridge financing until pledged grants arrive from the Office of the Chief Scientist and its ilk, or to open a foreign bank account at an affiliated local bank while staying in Israel (Bank Hapoalim USA in New York in our case) are examples of activities tailor-made for the needs of the segment.
Another activity with start-ups includes referrals and connections to the Israeli and foreign high-tech ecosystems investors, service providers, strategic partners, and so forth. It is hard to minimize entrepreneurs’ need for this activity and the value they accrue from it, irrespective of the regular financial activity with the bank. When a company reaches the income stage, commercial credit from the bank comes into the picture.
In contrast to companies in other industries, start-ups sometimes face difficulties due to the nature of their customers, a short to zero income history, and the fact that the company is still losing money. Considerable thought is given to the nature and conduct of the investors in the venture, with an emphasis on suitable response times. As the company progresses, it is easier for the bank to work with it. The test, therefore, is in the early stages, and hence the importance of working with a specialist bank.
The author is the head of high tech at Poalim Hi-Tech
Published by Globes [online], Israel business news - www.globes-online.com - on December 31, 2015
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