Is raising funds always a good idea?
While Emmanuel Macron announced that he wanted France to have 25 unicorns by 2025, this figure was reached on January 17, 2022, and is now at more than 27 French unicorns. But how are these unicorns born? Thanks to the fundraising done by their founders. These fundraisings are constantly increasing and reaching ever more enormous amounts. However, is the amount of funds raised really an objective indicator of the company's economic health?
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How does fundraising work?
First, let's look at how fundraising works. When a company is created, it needs funds to develop, pay its expenses and buy the raw materials that will allow it to sell its own products. However, all these costs are often important and prevent the company from developing as it would like. So, to compensate, the founders decide to raise funds. But how does fundraising work? The company looks for investors (institutional, such as investment funds or banks, or individuals, such as business angels). If the investors believe in the company's project and trust its business plan, they decide to invest in the company. To do so, they buy shares in the company and ask for a pre-determined return on investment.
By doing so, the startup gets cash to develop, but loses part of its sovereignty and must then face its investors who demand a quick return on investment.
Fundraising: the new indicator of a company's financial health
With a record of €11.6 billion raised in 2021, FrenchTech continues to break every record. On average, it is estimated that €15 million is invested per fundraising. This figure is THE amount highlighted in the press and in the media, which turns it into a sign of economic health. Indeed, if a company has 100 million euros (amount raised) at its disposal, one can only imagine that it is profitable.
However, this amount does not say how much the company is supposed to pay back its new partners. On the contrary, an indicator such as the profitability of the company for one euro invested would be much more meaningful. Let's remember that less than 10% of the companies that have raised funds reach profitability. Most time, they end up in judicial liquidation in order to be able to pay back their investors.
Read more: FrenchTech 2021: the biggest fundraisers
Are fundraisings really profitable?
As previously stated, less than 10% of the companies that raise funds become profitable. Indeed, profitability often requires time, since the company must make a name for itself on the market, accept to reexamine itself and test different strategies before finding the one that will work. This time represents money that the company does not have. We can take the very concrete example of the company Take It Easy which had raised 16 million euros in 2015, before being placed in receivership in 2016 because it could not pay its debts. It is therefore understandable that the amount of fundraising is not a good enough indicator.
However, if companies could successfully negotiate a fundraising with a longer timeframe for repayment with their investors, profitability could be achieved. Indeed, let's recall that it took Amazon 9 years to become profitable. However, nobody can say today that Amazon's business plan is not good. The company just needed time to impose itself on the market and to acquire the monopoly of distribution.
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