Financing a Start-up Company in the Czech Republic

Financing a Start-up Company in the Czech Republic

Written by Leos Stehlik
for Expats.cz

Despite many potential problems, there are many feasible possibilities in the Czech Republic to finance the resource-intensive projects. The Czech market has still a long way to go to develop itself into an environment, which is friendly to new businesses; however the situation nowadays is rather promising.



To finance a start-up company, businesses have the opportunity to obtain financial resources from banking institutions, governmental programs, EU grants, business angels and seed capital funds. Entrepreneurs who intend to finance their start-up projects needs to consider, which of these financial sources is the most suitable for them.

To increase the chance of finding a suitable financial partner, entrepreneurs must have prepared an excellent business plan, have an in-depth knowledge of their project, and be prepared for long, challenging times during the process of funding their projects.

The real-life case study and lessons learned may help start-up companies to avoid unnecessary situations and mistakes, and inspire them in their own entrepreneurship.

INTRODUCTION

Since February 2006, The World Bank officially considers the Czech Republic a standard, fully developed free market economy. Despite this very positive achievement, entrepreneurs still face a lot of complications and barriers when they start new businesses. The main problem which most start-up companies face is the limited possibility to obtain financial resources to carry out business plans.

Even though the situation in this area got better in the last few years, there is still a pretty long way to go for the Czech Republic to become an effective, fast growing economy driven by the power of start-up companies.

PURPOSE AND SCOPE

The purpose of this report is to give the Czech entrepreneurs an overview of available possibilities to look for the start-up capital.

In this report, we discuss possibilities of financing a start-up company. We also discuss some of the potential problems most entrepreneurs may most likely face. Finally, we suggest the most important things which need to be done prior starting to seek the start-up money. We demonstrate the feasibility of obtaining the necessary capital for the start-up company on the real-life case study. At very end of our report, we summarize lessons learned and our recommendations.
 
ASSUMPTION

We focus our report on larger start-up projects (100+ millions CZK, or 3.4 million EUR). However, entrepreneurs, who consider carrying out smaller projects, may benefit from the information presented in our report as well.

METHODS

Our report uses online and library sources. For our case study, we used non-public information from the actual business plan of an existing company. For the sake of privacy, we use fictitious names.

LIMITATIONS

The information discussed in this report is recent at the time of writing this document. We assume that situation in this field will develop in the coming years, and that many of the included information will become obsolete.

WHERE TO LOOK FOR THE START-UP CAPITAL

There are many possible sources of the start-up money in the Czech Republic. Table 1: Sources of the start-up capital in the Czech Republic, summarizes those sources, their main focus and their limitations.

Source of capitalAmount of capital offered(million CZK)Limitations
Banking sector0.1 – 5Only limited number of baking institutions offers financing of start-up companies
Government programs1 – 10Focused mainly on SMB segment and first-time entrepreneurs or sole proprietors
EU grants1 – 150Not suitable for all projects. One of the main criterions to get an EU grant is social and public interest.
Business angels5 – 20One of the only possibilities to finance small- to mid-size start-up projects
Seed (risk) capital funds20 – 300The only real possibility to finance large projects
Table 1: Sources of the start-up capital in the Czech Republic

In the following paragraphs, we discuss the potential start-up money sources in more details.

Banking Sector
In many cases, most commercial banks in the Czech Republic do not finance start-up companies. There are, however, some exceptions. Komercni banka, Ceska Sporitelna and GE Money Bank offer programs for very small businesses and sole proprietors. The amount of money offered under these programs ranges from hundreds of thousands up to 5 million CZK for a single company or sole proprietor.

In order to finance larger projects, entrepreneurs should consider programs offered by one of the global investment banks, such as City Bank, Credit Suisse, Morgan Stanley or JP Morgan Chase. Please note that those mentioned institutions are only mentioned as examples and do not represent the complete list of international investment banks.

Government Programs and State Secured Loans
At the time of writing this document, the existing governmental programs are focused to support very small businesses and individuals (entrepreneurs / sole proprietors) and are therefore not suitable to finance a mid to large-size projects.

The Government programs are in the Czech Republic offered through the Czech-Moravian Guarantee and Development Bank (CMZR Bank).

EU Grants
The EU grants are offered though the “Community programmes” and the “Structural funds”.

Entrepreneurs in the Czech Republic can apply for grants from the following Community programmes:

· Small and Medium-Sized Enterprises
· Equal Opportunities
· SAVE II.
· Socrates II.
· Leonardo da Vinci II
· Youth and Culture 2000

The most grants from the Structural funds are focused to help resolve social problems structural economic anomalies. At the time of writing this document, following grant programmes are implemented:

· The European Regional Development Funds (ERDF
· The European Social Fund (ESF)
· The European Agricultural Guidance and Guarantee Fund (EAGGF – Guidance Section)
· The Financial Instrument for Fisheries Guidance (FIFG)

Most of these programs use the “retrospective financing” principle. This, in other words, means that the enterprise or start-up company has to obtain the financial resources for the project in advance from other institutions (banking sector, governmental programs, business angels or risk capital funds). The actual costs and expenses will be then reimbursed by the appropriate structural fund at the end of the project realization. This is one of the main reasons why EU grants are in many cases not suitable for financing a start-up company.

Business Angles
Business angels are individuals who have their own financial resources available and hence looking for interesting entrepreneurial investment opportunities. A business angel wants to invest his money in order to:

· support new, interesting ideas (projects)
· profit from such investments

Business angels usually require having a reasonable share in the start-up company. The purpose of this requirement is to have the right to control and to influence the business direction of the company and to have profit from future gains.

However, some business angels do not require direct control over the company and hence do not want to co-own it. Instead, they support the project by offering a long-term loan. In such case, they profit from the interest rates; or they might become so called “silent” (“sleeping”) partners. Such partners do not have any rights to govern the company; however they can claim a particular percentage whack on future gains.

If you need to finance a small to mid-size project with the budged ranging from 5 to 20 million CZK, a business angel represents a very good option for you. If your financial need is above the 20 million CZK limit, you may try to convince two or more business angels to participate in your start-up.

Seed Capital Funds (Risk Capital Funds)
The seed capital funds (or Risk capital funds) are usually formed by two or more business angels and investment banks to finance large start-up projects. The larger the projects (and the more financial resources needed), the higher risk exists for an individual financial partner. To minimize, or even to eliminate the risk, business angels and investment banks often form a joint company, so called capital fund. Such fund then becomes your financial partner.

In the Czech Republic, there are many institutions and companies who may help you find the right capital fund for your projects. Some of these companies are summarized in Table 2: Institutions and companies involved in the seed capital funding process.

InstitutionContact information
Central Europe Angel Advisorswww.ceaa.cz
Central European Advisory Group www.ceag.cz
The Czech-Moravian Guarantee and Development Bankwww.cmzrb.cz
The Seed Capital Company, s.r.o.www.seedcapital.sk
The Czech Venture Capital Association www.cvca.cz
Milestone Partnerswww.milestone.cz
Renaissance Partners www.rp.cz
Genesis Capital (Advent Intl.)www.genesis.cz
Angel Investor Associationwww.aia.cz
Table 2: Institutions and companies involved in the seed capital funding process 

PROBLEMS AWAITING ENTREPRENEURS DURING THE FUNDING PROCESS

If you are an entrepreneur who tries to fund a star-up company, you can expect many problems on your journey.

When you schedule the first meeting with an investment banker whom you would like to convince them about your project´s excellence, one of the first questions he or she may have would be: “What is your entrepreneurial history? Oh, none yet? Well…” That is one of the first signs that the bank is not interested in financing your project.

Another problem with banking institutions, and the loans they provide, is the guaranty. If you do not have enough fixed assets to provide a sufficient guaranty, the bank will most likely not provide you with the loan.

When you search for business angel and capital funds contacts, in many cases your first contact will be arranged through their agents and brokers. Some brokers are however, only interested in the initial provision fee. They often require you paying the fee prior or during the initial meeting with them. If you want to avoid trouble and filter out tricksters, do not pay anything in advance. Instead, try to persuade them that you will pay the fee only then if they are able to help you get the financial resources you need. In addition to that, you can offer to pay them extra provision as a bonus. Such provision could be for example a percentage from the total capital money they obtain for you.

Again, there are numerous other problems waiting at you; however we consider worth pointing out at least the above mentioned ones.

REQUIREMENTS: WHAT DO YOU NEED TO PREPARE?

Prior to scheduling a meeting with your prospective financial partner, the most important thing you need to prepare is your business plan.

Have your business plan ready in at least three versions:

· the short version, so called elevator pitch
· the standard edition, which covers the main aspects of your project, including financials
· the in-depth material, which covers each and every detail

If you need to brief somebody about your project, you will use the short “elevator pitch” version to see whether your prospective partner is interested in your idea or not.

In case your partner is interested and requests a meeting with you, you need the “standard business plan version” that covers all the main aspects and financials. 

The in-depth material is needed especially during the due-diligence process. This material should answer each and every question your financial partner may have about your project. In addition to this, it is a unique opportunity for you to identify and eliminate any possible logical fallacies in your project.

Besides having your business plan ready, we suggest you to spend a great amount of time on financial modeling of your project. Try to include any possible negative aspects you may encounter during the project realization. Later, you can use your financial models to discover the right time to take action if anything goes wrong once you start your business.

LESSONS LEARNED

While we were working on the process of financing the project introduced in our case study, we have some lessons learned we would like to point out.

If you need to contact business angels or capital funds through their brokers and agents, be very careful. Especially you need to be vigilant when discussing and signing contracts regarding brokerage fees and provisions. Some brokers demand inadequate provisions, while others are interested only to have you pay the initial processing fee. And not providing you any additional services, of course.

Sometimes a suspicious-looking broker, who you would never consider to be successful in obtaining money for you, proves in the end to be the most successful one.
Be patient with explaining each and every detail of your project. Do not expect your partners to be experts in what you plan to do.

Be honest about your project, underestimate planned revenues and profits and overestimate costs and expenses. Do not hide anything, keep in mind that if you fail, you will be in trouble, not your financial partner.

CONCLUSION

Despite many potential problems, there are feasible possibilities in the Czech Republic to finance resource-intensive start-up projects. The Czech market has still a long way to go to develop itself into an environment which is friendly to new businesses. However, the situation right now is rather promising than hopeless. 
 
REFERENCES

www.ceaa.cz Central Europe Angel Advisors
www.ceag.cz Central European Advisory Group
www.cmzrb.cz The Czech-Moravian Guarantee and Development Bank
www.seedcapital.sk The Seed Capital Company, s.r.o.
www.cvca.cz The Czech Venture Capital Association
www.milestone.cz Milestone Partners
www.rp.cz Renaissance Partners
www.genesis.cz Genesis Capital (Advent Intl.)
www.aia.cz Angel Investor Association

Richard A. Brealey; Stewart Myers: “Principles of Corporate Finance”
J. Cardis, S. Kirschner, S. Richelson, J. Kirschner: “Venture Capital: The Definitive Guide for Entrepreneurs, Investors, and Practitioners”
J. W. Bartlett: “Fundamentals of Venture Capital”

Prepared by
Leos Stehlik
51 Berrylands
Orpington, Kent
BR6 9 TF
Tel: +44 7837 389 018
Email: lstehlik@milovice.net
Blog: http://stehlik.milovice.net

March 2006



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