THE EVOLUTION IN THE FINANCING OF STARTUPS: FROM RISK TO OPPORTUNITY

  • Latin America has led in self-financing, with examples in countries such as Colombia, where 94% of entrepreneurs have used their own resources to execute their ideas
  • Start-up ventures are still considered high risk for financial institutions, so leveraging resources is becoming a major priority for private investors
  • Transversal to financing alternatives appears the blockchain as a key infrastructure in the security of financial services of the future

The revolution of the shared economy opens up new financing opportunities for entrepreneurs in a scenario in which risk contrasts with opportunity. Financing has been and always will be a dilemma for entrepreneurs.

According to FlexFund, Latin America has led in self-financing, with examples in countries such as Colombia, where 94% of entrepreneurs have used their own resources to execute their ideas. This has even demanded “sell the car, mortgage the house and take out the savings,” according to a study by the Strategy and Competitiveness Center of the Universidad de los Andes.

“The banking credit gap in the region is substantial and a large part is due to the turbulence of the macro and financial history of Latin America and the Caribbean and the scarcity of promising and productive projects rather than credit rationing and credit restrictions. the side of the offer in themselves, “explains the research.

But the landscape has begun to change thanks to the techno-Latinos club, those regional companies that emerged as ventures and today have a collective value of over 37,700 million dollars, according to an analysis of NXTP Labs in which companies like B2w (Brazil), Crystal Lagoons (Chile), Despegar (Argentina), Mercado Libre (Argentina), among others, which have cemented investor confidence.

From private equity funds to securitization

Start-up ventures are still considered high risk for financial institutions, so leveraging resources is increasingly a priority for private investors. But, “how do entrepreneurs, armed with little more than an idea and a prototype, manage to obtain large sums of cash? Through a complex and rapidly growing network of “angel investors”, venture capitalists and institutional investors, “says a CNBC report.

Private investment funds are established as one of the main mechanisms currently used to fund businesses. Proof of its impact is that only in the United States private equity funds raised about 144.520 million dollars in 2015. Based on the future potential, investors bet on the profitability that these companies will obtain and negotiate the return on their investment.

The “angel investors” are an example of private financing in markets such as the United States, where the barrier of 20,000 million dollars was passed in this type of transactions per year. In addition to this, securitization, the mechanism through which an illiquid asset becomes a bond that is issued in the capital market and generates returns to investors, is also projected as an alternative for startups.

And not only large companies are prone to securitization, but a great variety of ventures such as those with current assets or to develop. For example, a company that is looking for funds for a technological development, decides to issue a note that grants its buyers a participation in future returns in the project and that can be purchased by investors, thus simplifying its funding process.

From private equity funds to securitization

In addition, and thanks to the technological revolution, digital services such as Kickstarter with more than 120,000 financed projects or Indiegogo with 650,000 have become allies of entrepreneurs from crowdfunding. “The other type is the ‘crowdfunding of equity’ (or securitization), which allows investors to obtain capital in exchange, thus becoming shareholders and being able to participate in the future returns that new companies could offer to investors”, highlights Startupxplore

Statist figures show that the worldwide crowdfunding market moves more than 16.2 billion dollars a year, with North America being one of the most active regions with 375 crowdfunding platforms. Explains that the financial crisis of 2008 gave way to these alternatives due to the “strict policies of loans after the recession and the resulting difficulties experienced by small businesses,” which have forced them to look for alternative sources as a way to avoid resorting to loans banking.

Transversal to these alternatives appears the blockchain as a key infrastructure in the security of financial services of the future. The expert Roberto Touza, quoted in a blog of the Business School of Innovation and Entrepreneurs IEBS, says that “we have not yet seen a 10%” of the potential that technology has. “To date, applications have been highlighted in the monetary environment, with the explosion of countless currencies (BTC, ETH, etc.) as well as the ICOS (initial coin offering) that is revolutionizing the usual structure of financing business projects in the early stages , says Touza.

In short, these financing alternatives, where small, medium and large private investors converge, have significantly changed the financing landscape in startups.

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