The entry of investors into startups It is a double way path. On the one hand are the startups trying to leverage itself in the market, in search of resources to increase its working capital and materialize its solution. On the other hand, there are investors, dividing their contributions into a wide investment portfolio and increasingly betting on venture capital in search of greater financial returns.
The ways of entering the invested amount (financial and/or technical) in the startups have several peculiarities and depend, mainly, on the stage in which the company is. It is important that the financial plan defined for carrying out the contribution is in line with the legal structure chosen by the company and the investor.
Currently, the most common types of investment in startups are, in summary, the following:
Incubators: they are institutions that offer technical, managerial support and complementary training to micro and small companies, so that they create and develop their activities before entering the market (1). Incubators aim to facilitate the innovation process of startups and their access to new technologies. They usually offer a physical space with offices and laboratories, in addition to spaces for common use such as auditoriums, meeting rooms and a series of other benefits linked to teaching and research institutions, government agencies and the private sector (2).
Accelerators: they can be considered as a stage after the incubation phase. Accelerators can often provide the same services as incubators, but with the main objective of guiding the administrative part of the business, helping in the managerial development of the company and mainly assisting in the dissemination of products and services, in order to prepare the startup for receiving financial contributions from third parties. In addition, the accelerator makes its own contribution, generally receiving a share in the startup's share capital or a future purchase option (3).
Angel Investment: form of investment that occurs in the initial phases of the company - early stage (4). It is commonly performed by individuals, usually self-employed professionals, entrepreneurs or experienced executives, through their personal assets. This form of investment is called smart money, since the investor also brings his expertise and market experience to the business (5). It is noteworthy that the Brazilian legislation, when regulating the angel investor, through Complementary Law 155/2016 (6), allowed investment funds to also fit in the condition of angel investor.
Seed investment: it's the call seed capital. This form of investment is at a stage above the angel investor. This is the first contribution that the company will receive from an investment fund. In this fund, several investors get together with the aim of mitigating the risks of their investments, investing money in several potential companies and increasing their chance of success in some of them (7). This form of contribution is usually carried out in startups that already has a service/product launched on the market, with revenues of up to R$ 5,000,000.00 (five million reais), and investment values ranging between R$ 2,000,000.00 (two million reais) and R$ 5,000 .000.00 (five million reais) (8).
Venture Capital and Private Equity: these are investment modalities carried out through investment funds. The big difference between the two is when the company will receive the investment. Venture Capital, as the name in English already says (adventure capital), is the investment made in companies with great potential for appreciation, but which still have several risks for investors because they are in a phase of development and rise in the market. already the Private Equity, is the investment made in more consolidated companies in the market, with significant revenue and cash flow (9). It is usually an investment made for plant expansion and/or distribution network, working capital or branding (10).
Crowdfunding: is a form of crowdfunding, in which several investors finance startups through digital platforms. In this model, entrepreneurs launch their ideas on the market through these platforms and seek people interested in investing and leveraging their business. In 2017, the Securities and Exchange Commission regulated this form of investment, conceptualizing it through article 2, I, of CVM Instruction No. 588 (11).
Against the promising backdrop of startups, it is essential for the success of a company that seeks greater legal certainty to have the support of experienced professionals who are used to working with investors in emerging companies.
Cesar Peres Dulac Müller Advocacia Empresarial's specialized team in Corporate Law is at your disposal to assist in these types of investment, making the high rich into a calculated risk, with due legal support.
(1) FERNANDES. Pedro Wehrs do Vale. The Legal Nature of Incubators and Accelerators and their Contractual Relationships with Start-ups. Published December 11, 2017. Available at: http://www.bpbc.com.br/a-natureza-juridica-das-incubadoras-e-aceleradoras-e-suas-relacoes-contratuais-com-as-start-ups/ Accessed February 16, 2020.
(2) SEBRAE. How business incubators can help your business. Available in:https://www.sebrae.com.br/sites/PortalSebrae/artigos/as-incubadoras-de-empresas-podem-ajudar-no-seu-negocio,f240ebb38b5f2410VgnVCM100000b272010aRCRD Accessed February 16, 2020.
(3) FERNANDES. Pedro Wehrs do Vale. The Legal Nature of Incubators and Accelerators and their Contractual Relationships with Start-ups. Published December 11, 2017. Available at: http://www.bpbc.com.br/a-natureza-juridica-das-incubadoras-e-aceleradoras-e-suas-relacoes-contratuais-com-as-start-ups/ Accessed February 16, 2020.
(4) SEBRAE. Startup investment. Available in:https://www.sebrae.com.br/sites/PortalSebrae/sebraeaz/investimento-e-confidencialidade,626a39407feb3410VgnVCM1000003b74010aRCRD Accessed February 16, 2020.
(5) PORTO, Éderson Garin. Startup Legal Manual: how to safely create and develop innovative projects. Porto Alegre: Livraria do Advogado, 2018. p. 65.
(6) Complementary Law 155/2016, which modified Complementary Law 123/2006. Art. 61-D: Investment funds will be able to contribute capital as angel investors in micro and small companies.
(7) GOMES, Ricardo dos Santos e Silva. Legal Structures and Investments: protection and guarantees for investors in Startups. Sao Paulo. Article – Insper, 2018. p. 20. Available at:http://dspace.insper.edu.br/xmlui/bitstream/handle/11224/1990/RICARDO%20DOS%20SANTOS%20E%20SILVA%20GOMES_Trabalho.pdf?sequence=1 Accessed February 16, 2020.
(8) PORTO, Éderson Garin. Startup Legal Manual: how to safely create and develop innovative projects. Porto Alegre: Livraria do Advogado, 2018. p. 66.
(9) CAMARGO, Renata Freitas de. Private Equity and Venture Capital investment funds: one of them may be ideal for your company. Published August 15, 2017. Available at:https://www.treasy.com.br/blog/private-equity-e-venture-capital/ Accessed February 20, 2020.
(10) The Private Equity and Venture Capital Industry – 2nd Brazilian Census. Brazilian Agency for Industrial Development, Center for Management and Strategic Studies. Brasília: Brazilian Agency for Industrial Development, 2009. p. 71. Available at:https://bibliotecadigital.fgv.br/dspace/bitstream/handle/10438/8419/Private_Equity_e_Venture_Censo.pdf?sequence=1&isAllowed=y Accessed February 20, 2020.
(11) Securities and Exchange Commission. CVM Normative Instruction No. 588, Article 2, I.
Available in: http://conteudo.cvm.gov.br/legislacao/instrucoes/inst588.html Accessed February 16, 2020.
Source: Liège Fernandes Vargas.