Private Equity: Episode 25 – The Second Step in Startup Financing

In Episode 17, we looked at the first step in financing a startup: seeking investors. If this step is successful, the team is now ready to welcome its new investors.

Once the shareholders' agreement is drafted, negotiated, and signed, the funds are officially unlocked and made available to the startup for continued development.

However, the involvement of investors doesn’t stop there. Typically, they will join the company’s governing body (board of directors or supervisory board) and actively participate in the company’s governance. Investors bring their expertise and networks, challenge the decisions made by the management, and offer advice on strategic choices when needed.

The goal of this relationship is to build a real partnership that benefits the development of the project. This proactive approach also benefits the investors because the better the project is developed, the more value it will create, ensuring a higher return on investment.

The management team should not misunderstand the role of investors and should instead leverage their experience. Transparency is essential, and the team should provide accurate information about the company’s operations whenever possible. This collaboration tends to be mutually beneficial.

Maintaining a strong relationship with investors is also a critical asset for securing future funding rounds. Private equity firms may need to reinvest in their shareholding to support the company's continued growth.

This reinvestment can occur as part of new growth initiatives (new products, scaling operations, etc.) but may also be necessary during challenging periods (recapitalizing the company to offset losses or supporting cash flow due to delays in execution). This illustrates why maintaining good relationships is crucial.

For these reinvestments, existing shareholders can increase their stake (via a capital increase) and/or help introduce new participants, including accessing additional funding sources like Bpifrance.

Price adjustment mechanisms are usually implemented during these reinvestments to ensure the previous investors are not disadvantaged when new investors enter the company.

The final stage will be the investor's exit, which we’ll delve into in the upcoming episodes.