Corporate Growth with Equity Capital: 5 Sources for the Early Phase – and 1 Source for the Future

At some point, interest in the new product or service is sparked. The order book is starting to fill up, but there’s not enough capacity, for example, to meet the demand that’s been generated. Expansion of production and the recruiting of required staff has to be financed. The desire to retain independence remains high, so founders generally prefer to take on debt financing rather than equity financing.

This corresponds with the situation of SMEs in Switzerland. According to the white paper titled “The Future of SME Financing”, published by the  University of St. Gallen’s Swiss Institute of Small Business and Entrepreneurship in collaboration with SIX, debt financing via banks is the most common method, and generally the most important form of raising capital for SMEs. Some 38% of all SMEs make use of this method.

However, the opportunities afforded by equity financing are increasingly coming into the spotlight when it becomes capital intensive for a company.

Especially when they are first established (seed phase) and in the first one to three years (Series A financing round), many young companies often draw on their own funds, be it from savings, early withdrawals from the pension fund, or perhaps an early inheritance. Even friends, relatives, and acquaintances – otherwise known as friends, family and fools are commonly brought on board as investors at this stage.

Whether they are granted a share in the company, or given the right to have a say in it can be negotiated individually, and is up to the founder to decide. The important thing is that all arrangements be set out in a contract – particularly because the agreement involves people with whom there is a personal relationship.

As soon as the business plan exists and the market opportunities are recognizable, business angels also appear as a potential source of equity capital. These professional investors are frequently wealthy business people who often assist company founders not just with capital, but also by providing good advice and a solid network.

In return, business angels usually receive an equity interest in startups. Those looking for a business angel would do best by searching in the local and national startup scene, and ideally establish ties with the new contact through the existing network.

In addition to business angels, there are also institutional venture capital companies such as hedge funds, investment managers, or private equity firms that participate in the financing of startups. In return, these investors normally receive an equity stake. There’s a distinction to be made between venture capitalists, growth investors, and buyout managers:

Venture capitalists become involved in a company early on, often already in the founding stage, while growth investors only enter the scene when the company is already established and is willing and able to grow further.

Growth investors often want to have a voice in the management of a company in order to ensure that it performs well and is profitable. They provide their expertise and, in many cases, a very useful network.

Buyout managers focus on companies that have already matured to a certain point, and look for opportunities for mergers, or to sell them. To do this, they first try to establish a majority in the company, and often try to increase the company’s value via acquisitions and efficiency increases.

With crowdfunding, startups can use special internet platforms to present their business concept to a broad community and ask them for funding. In return, they might receive a share in the company, a share of future profits, or allocation of the product still in development, such as the use of a new application.

What’s interesting about this type of financing is that costs are relatively low for those seeking capital, while for those providing capital it’s an opportunity to support a large overall project with even the smallest of amounts. Very often, cultural, or charitable projects are realized through crowdfunding.

Overall, crowdfunding has become more popular in Switzerland in recent years, yet it remains less significant than other forms of equity financing. According to the Crowdfunding Monitor of the Lucerne University of Applied Sciences and Arts, a total of 792 million Swiss francs were invested in crowdfunding projects in 2021, an increase of 31% over the previous year. Of that total, however, only 147 million Swiss francs went toward financing startups. The lion’s share of crowd-sourced investment went toward the financing of real estate.  

There are many development programs in Switzerland that help startups get going by acting as incubators and giving them some additional momentum in the initial growth stages. Incubators help founders primarily in the initial stage during the development of the business model. With most of these programs, the incubators support startups not just with help and advice, but also by providing the requisite infrastructure and a broad network.

However, capital rarely flows as part of an incubator program. The incubators are usually organized according to sector, and are run by specialized investment firms or public or private initiatives as well as by tertiary institutions. In view of the technological competition, companies are also increasingly establishing their own incubators in order to develop new services, features, or products for their clients – which they can later buy and integrate.

Accelerators also support startups with help and advice, but only once the business plan is in place, and the path set out in the business concept has been clearly defined. Accelerator offerings usually involve time-limited intensive workshops in which a startup’s ideas are brought to market maturity at an accelerated rate. In many cases, financial support is provided, but many accelerators require a stake in the company in return.

There’s high demand for incubator and accelerator programs, and the application process is demanding. However, for company founders, having the opportunity to establish network contacts within such programs can pay off in later financing rounds and further growth.

SIX is the founder and most important minority shareholder in the F10 FinTech Incubator & Accelerator, and operates its own funds for corporate venture capital via SIX FinTech Ventures.

When their own resources have been depleted, startups as well as SMEs have to secure new capital. In addition to classic outside financing via banks, capital from venture capital funds is increasingly available to startups and other new fast-growing companies. In the early growth phase, private equity is catching up with financing through loans.

At this stage, it’s still too early for public equity – that is, an IPO. Such a move can make sense, however, for more established SMEs that are at a later stage in their growth. But this form of accessing capital remains rarely used.

According to the aforementioned study “The Future of SME Financing”, the reasons for this are numerous. It’s widely felt that an IPO is resource-intensive and that small companies can’t meet disclosure requirements. Often, it’s simply a matter of being unaware that this path is even available.

Listing your own company on the stock exchange is no longer just for the big players. Similar to BME Growth in Spain, SIX Swiss Exchange has launched Sparks, a trading venue especially for SMEs.

If you want to list your company there, and put the shares (at least 15%) up for public trading, the hurdles you face are lower than on the main segment of the Swiss stock exchange. For example, the fees for listing are 50% lower, and the requisite market capitalization is less than 500 million Swiss francs.

Sparks also ensures transparency and investor protection. That’s because all companies listed on the Swiss stock exchange are subject to the same reporting requirements and regulatory supervision. Shares of newly listed, growing SMEs typically have less liquidity. Sparks takes this into account with a shortened trading window.

A market flotation not only provides a growing company with an efficient influx of capital, it also leads to higher visibility and a wider diversification among investors.