Supporting start-ups over the long term: a major industrial challenge

by Jerôme Faul

Many engineers, young and old, are embarking on entrepreneurship in start-ups. For this movement to be an opportunity for both them and our country, it is essential that these very young companies can find sufficient financial support in terms of amount and duration to become the TWAs of tomorrow.

The enthusiasm for start-ups that can be observed in all countries owes nothing to chance. Because in a world where everything is moving very fast, these companies have strong competitive advantages. In a start-up, all interests are perfectly aligned. The chronic lack of cash defines a common objective: to industrialize a product or service to sell it. Everyone is working in the same direction, there can be no individual calculations, linked to their career or otherwise. Like a ship where everyone is rowing in the same direction, it’s hard to go faster. In a start-up, there is no past to manage. There is no risk of cannibalizing an existing product. There is no risk of disturbing loyal customers with something new. We make the best product at the moment T.

In a start-up, all row in the same direction.
“Somebody, somewhere, is developing a product that makes yours obsolete,” wrote Georges Doriot, the Frenchman who invented innovation capital in the United States in the 1950s. A few decades later, due in particular to Moore’s law, the pace of technological innovations driven by digital technology is reaching a pace that can only be sustained by start-ups, those young companies that have not yet reached financial equilibrium and that finance their growth through external capital contributions

Niche markets

A start-up is targeting a niche market. That may be the most important thing. Breakthrough innovations are aimed at a particular audience, the early adopters. This public is a minority that is not accessible to a large group which, by its nature, must deploy its offers on large markets, train its sales forces, set up a universal after-sales service, etc. And if this first market is small, it is enough for the happiness of a start-up which, starting from scratch, can be satisfied with relatively low turnover at the beginning.

Equity financing requirements

Having the right rhythm is not enough. Start-ups have a major problem, it is that they have no source of income to finance their developments. They need to find this funding outside their structure. This financing cannot come from the banking system, which waits, if it lends, for monthly payments to be repaid with certainty, which is not possible for a start-up. It is therefore necessary to accept equity financing from which the fruits will be derived when the start-up has created enough value to either become profitable and pay dividends or become attractive to an acquirer who will buy back with a capital gain the shares of the original financiers.

Funds to pool risks

But not all projects are successful. To avoid losing his stake, an investor must pool the risk. The best way to do this is to invest not directly in a particular start-up project but in a capital innovation fund that will be able to carry out the small number of investments that allow successes to significantly offset failures.
Thus, the 10-year average performance of innovation capital funds is 2.2% of annual net return for investors, with a trend towards improvement. The dispersion is quite strong with the best funds, making an annual performance of around 12%. There are approximately 200 innovation capital funds in France managed by around 50 teams.

American investment in innovation is $170 per capita per year.

Agility and reactivity
A start-up is agile. Decisions are made in a timely manner