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Definitions of funding sources


Glossary of terms related to different sources of funding
  • Business angels (informal venture capital): private individuals who invest part of their estate in start-ups in the form of venture capital and also contribute their personal managerial expertise.
  • Business Angels Networks (BANs): standing regional platforms that promote the matching of business angels with potential investees.
  • Buyouts: existing investors’ shares in a business are bought by the latter’s own management team (MBO – Management Buy Out) or by another management team supported by a venture capital fund.
  • Corporate venturing: venture capital invested by existing firms for the purpose of funding innovative businesses set up by their own staff or active in industries considered of strategic importance.
  • Crowdfunding: a process whereby a large number of individuals – generally web users – fund a project via a personal contribution in the form of equity or a loan.
  • Development or expansion capital: financing provided for the growth and expansion of a company, which may or may not break even or trade profitably. Capital may be used to: finance increased production capacity; market or product development; provide additional working capital.
  • Early stage (or start-up) finance: equity invested in businesses that are past research and development but need additional funding to market their products and services.
  • Equity: ownership interest in a company, represented by the shares issued to investors.
  • Expansion: growth, bridging or restructuring capital.
  • Factoring: a technique whereby SMEs sell invoices to specialised firms.
  • Financial package: a combination of different funding sources.
  • Grants: subsidies paid—without an obligation to refund—by public authorities to companies investing in a region for the purpose of facilitating their establishment or expansion.
  • Growth accelerator: an advisory and matching platform where tech start-ups and investors meet to allow businesses to access financial resources, new markets and specialist expertise.
  • Investment readiness: set of advice given to to entrepreneurs in order to better prepare them to meet with potential investors.
  • Leasing: hire-purchase of capital goods.
  • Loans and debt: the main sources of funding for SMEs offered by banks. Today some peer-to-peer crowdfunding platforms are active in this field.
  • Mezzanine: combination of equity and loans. Applicable interest rates are often comparatively high.
  • Microcredit:
  • Proof of concept: finance provided to a researcher’s team to support the validation of their business ideas. Often, the financial instrument takes the form of a grants and subortinated loans.
  • Quasi-equity investment instruments: instruments whise return for the holder (investor/lender) is predominantly based on the profits or losses of the underlying target company, are unsecured in the event of default and/or can be convertible into ordinary equity.
  • Replacement capital (also called secondary purchase): Purchase of existing shares in a company from another private equity investment organisation or from another shareholder or shareholders - an investor buys another’s stake.
  • Risk capital: Equity and quasi-equity financing to companies during their early-growth stages (seed, start-up and expansion phases) in the hope of a return on investment (ROI) that is both large and speedy, on a par with the level of risk taken.. It includes: (1) informal investment by business angels; (2) venture capital; (3) alternative stock markets specialised in SMEs and high-growth companies.
  • Seed capital: Financing provided to study, assess and develop an initial concept. It precedes the start-up phase. Seed capital is required to fund a business project before the product or service is marketed. Seed capital is often pivotal in high-tech projects to allow businesspersons to conduct market and technology surveys as well as research and development on prototypes that will become companies’ core business.
  • Start-up capital: Financing provided to companies for product development and initial marketing. Companies may be in the process of being set up or may already exist, but have not sold their product or service commercially and are not yet generating a profit.
  • Venture capital: Investment in unquoted companies by investment funds (venture capital funds) that, acting as principals, manage individual, institutional or in-house money. It includes early-stage and expansion financing, but does not include replacement finance and buy-outs.
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