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Government of the Russian Federation

National Research University Higher School of Economics

Faculty of Management

STARTUP FINANCING. RUSSIAN AND EUROPEAN COMPARISON

Master Thesis

in the field of “Management” 38.04.02

“Global Business” Master's programme

startup business financing

Savinov Daniil Dmitrievich

Reviewer

Director of Dogezer LLC

Kozlov Alexander Igorevich

Academic Supervisor

Doctor of Management Sociology Sciences, Professor

Plotnikov Mikhail Vyacheslavovich

Nizhny Novgorod, 2020

Table of Contents

List of figures

1. Introduction

1.1 Background of the study, professional and research significance

1.2 Problem statement

1.3 Hypotheses

1.4 Object and subject of the research

1.5 The goal and objectives of the research

2. Startups as a new form of business. Exploration of lifecycle, funding and financing practices; and key challenges

2.1 Defining startups

2.2 Startup development stages or startup's life cycle

2.2.1 Product development and organization growth approaches

2.2.2 The connection between startup funding/financing and its development stages

2.2.3.Framework of knowledge for startup lifecycle definition

2.3 Funding and financing of startups with a concern for each stage of lifecycle

2.4 Funding and financing practices for different stages of a startup's lifecycle

3. Comparing Russian and European (Austrian) funding/financing and support

3.1 Defining the comparison. Methodology

3.1.1 Presuppositions

3.1.2 Methodology and research sources selection

3.1.3 Hypotheses formulation

3.2. Comparison

3.2.1 Revenue statistics and sources of funding

3.2.2 Key challenges

3.2.3 Support from the government and public institutions

3.2.4 Sources for funding and financing

3.2.5 External capital raised so far / planned

4. Findings and discussion

5. Limitations and implications for future research

6. Conclusion

Reference list



List of figures

Figure 1. "Waterfall" model for product development.

Figure 2. Startup 3-stage lifecycle model

Figure 3. The New-Product Development Decision Process

Figure 4. Funding of startups on different stages of startup development

Figure 5. “Startup lifecycle with stages of financing”

Figure 6. “Lifecycle of an innovative company with categories of investors.”

Figure 7. Startup revenue reported for the last 12 months in Russia

Figure 8. Startup revenues reported for the last 12 months in Austria. Number of respondents = 428

Figure 9. Main problems of Russian startups

Figure 10. Greatest challenges for different foundation types of Austrian startups. Number of respondents = 591

Figure 11. Greatest challenges for European startups (2018)

Figure 12. Government and institution support for Russian startups in 2019

Figure 13. Cooperation with public institutions of Austrian startups. Number of respondents = 567

Figure 14. Sources of funding for launching a startup for Russian startups in 2019

Figure 15. Sources of funding for Russian startups at the moment in 2019

Figure 16. Distribution of funds sources after launch for Russian startups in 2019

Figure 17. Funding sources for Austrian startups. Number of respondents = 441

Figure 18. Greatest challenges for European startups (2018)

Figure 19. Whether Russian startups have external investors or not in 2019

Figure 20. External capital planned for Russian startups in 2019

Figure 21. External capital raised so far for Austrian startups in 2019. Number of respondents = 423

Figure 22. External capital planned to be raised in the next 12 months for Austrian startups in 2019. Number of respondents = 388



1. Introduction

1.1 Background of the study, professional and research significance

In the last few decades, the market has been flooded with start-ups - young innovative companies under 3 years of age. A startup is a company that has just appeared on the market and is in the initial stage of development, which introduces a new product to an existing or new market, or segments the market, creating a new niche. (In this way the startup meets all project criteria: in a limited time with limited resources a new, unique product or service is created.) Startups are very attractive to young entrepreneurs by the prospect of realizing their ideas and creating their own business, as well as the opportunity to be an entrepreneur, not an employee.

The development of startups is a new paradigm, which has emerged as a result of business evolution in the last decade. Some may suggest, that the evolution of business models is natural and logical. However, there is another position, that would indicate, that the startup boom, which has started around 2010, is a result of a complex and rapid changes in world economy, technological progress and globalization.

In the context of globalization, which is characterized by variability and complexity, enterprises and entrepreneurs in various fields of activity are required to constantly seek new opportunities and use new approaches to doing business. As a result, the development of startups becomes one of the main tasks for formation and support of the national economy. Technological improvement and optimization of the production process are important factors in ensuring competitiveness, the role of which is growing significantly every day. Under these conditions, startups are an important aspect in increasing the attractiveness of the country's investment climate, developing innovative activities and supporting small and medium-sized businesses.

Start-ups are perceived as spearheads in innovation and technology - thus, it is not surprising that a vast number of start-ups is active in the IT-sector. By not only being innovative but by also striving for significant international growth, start-ups bear a higher risk which makes them rely on external risk capital to a greater extent than other new ventures. This is raising the question of how start-ups are acquiring capital and funding their business activities and which sources they are using.

Startups are financed through new sources and instruments. At the stage of rapid growth, with limited bank lending instruments, companies need additional financial resources, which has resulted in the emergence of new types of financial intermediaries, such as crowdfunding platforms, venture capital funds, private equity funds, as well as business angels and strategic investors.

Today, startups are the main actors in the development of the innovation economy worldwide and show high growth rates. According to the latest data by the research center Startup Genome (2019), the total value created from global startup economy in the period from January 2016 to the first half of 2018 has reached $ 2.8 trillion, which is 20.6% more than in the period from 2015 to 2017. The analysis of statistical data for the period of distribution of startups has shown an active growth of the global startup economy for the last 5 years in most major innovation sectors. The fastest-growing sub-sectors are in Deep Tech category, as it was reported in 2018's report. Top 4 fastest-growing sectors over the last 5 years are: Advanced Manufacturing and Robotics - 107,9%; Blockchain - 101,5%; Agriculture tech(agtech) and New Food - 88,8%; Artificial Intelligence, Big Data and Analytics - 64,5% (Startup Genome, 2019).

The USA is still the leader in the startup ecosystem ranking (Startup Genome, 2019). The best startup centers, such as Silicon Valley and New York, have maintained their leading positions for many years. Silicon Valley, known for the discovery of high-tech companies such as Google, Cisco, Facebook and Apple, is considered the most promising startup center in the world. Number 3 and 4 on the ranking are London and Beijing. According to the report of Startup Genome (2019) these cities are leading due to historically developed startup ecosystem in the developed countries they are based.

As for the developing countries, the situation is not as bright as it is for the developed ones. However, the Startup Genome (2019) lists Moscow (Russia) as an example of a “challenger” - a city, which can be in the top-30 leading startup ecosystems in the next 5 years. According to StartupBlink (2019), Russia is in 15th place in terms of the development of the startup ecosystem (after the USA, UK, Canada, Israel, Australia and other countries). In the document "National report on innovations in Russia 2017" published by the Russian Venture Company and the Ministry of Economic Development, it is noted that for most indicators of the impact of innovation on the economy and society, including the growth rate of productivity and life expectancy, Russia is still behind the leading innovation economies. The country has not yet become a global leader in high-tech markets, and domestic products are characterized by insufficient competitiveness (Andrushchak et al., 2017).

As a result, it can be suggested, that startups, while practically being one of the most important economy boosting factors for a country are still a new form of business, which has its own new challenges. It turns out, that many researches have already given an insight into what startups are, what is a startup's lifecycle and what kind of financing or funding a startup can get. However, there are no research papers to be found, which examine particular startup environments. Startup Genome (2019) and StartupBlink (2019) provide a very broad discussions on startup environments in general, moreover, they highlighted the specifics for Russian startup environment. This research is aimed to narrow the research down to two countries and startup environments within them. As there is no similar research prior to this one, a comparison of Russian and Austrian startup environments is an opportunity to fill a gap and provide both entrepreneur and research communities with unique research.

The main focus of this thesis is on one of the statistically most important challenges - funding, financing and support. The significance of this challenge is confirmed by two statistical sources for Russian and Austrian startups by Soloviev et al. (2019) and Leitner, K-H., Zahradnik, G., Dцmцtцr, R., Jung, S. and Raunig (2020) respectively, and it will be discussed in the methodology chapter. The selection of Austria as a comparable will also be explained in the methodology section of this research.

The first section of this research, will begin with analyzing the understanding of startup as a definition. Further, the research analyzes the works of many authors, research analytical centers and institutions in order to have an overview of startup's funding and financing opportunities. The research outlines what are the specific ways startups can get funding and financing on different stages of a startup's lifecycle. After the suitable to the topic of startup funding, financing and support literature is reviewed, the practical chapter of this work begins. The practical part of the work is an analysis of the statistics on Russian and Austrian startups. In the methodology section it is described how this research is aimed to compare the two countries on the case of funding, financing and support for startups and derive the similarities, differences and conclusions out of this comparison. The resulting conclusion suggests the ideas on how both countries could improve the startup environment and how this will benefit each of them.

1.2 Problem statement

Research question: What are the differences and similarities in startup funding, financing and support in Russia and in Austria?

1.3 Hypotheses

Please refer to methodology section for hypothesis formation.

H1. The statistically most significant challenges for both Austrian and Russian startups are the ones related to funding/financing and/or support (compared to other challenges);

H2. Austrian startups are more satisfied with public sector (institutional) and government support than Russian startups.

H3. In the Austrian report, the expression/difference of challenges related to funding, financing and support to the other challenges is higher, than it is in the Russian report.

H4. In both Austria and Russia using personal/own funds (self-funding) is the most common way of funding/financing for startups.

1.4 Object and subject of the research

Object of the research is funding, financing and support of startups

Subject of the research is the comparison of statistics on funding, financing and support in Russia and in Austria

1.5 The goal and objectives of the research

The main goal of the study is to compare funding, financing and support of startups in Russia and in Austria and to provide conclusions in a form of recommendations for one or for both countries on how to improve startup environment.

The tasks of the paper include:

1. Explore startup definitions, startup specifics as a different business type;

2. Identify and describe a startup's lifecycle and its connection to funding/financing and support.

3. Analyze the given statistical sources on Russian and European (Austrian) startup environments;

4. Compare funding, financing and support statistics for startups in Russia and Europe (Austria);

5. Provide discussion of the results, limitations and implications for future research and a conclusion.



2. Startups as a new form of business. Exploration of lifecycle, funding and financing practices; and key challenges

2.1 Defining startups

The startups are a new trend of the last fifty years. The use of the word "startup" in relation to the company began in the era of dot-com bubble at the end of XX century, when the market appeared many Internet companies that offered to do business using Internet technology. Nowadays, this term is very popular and used by many entrepreneurs in a wide range of activities. However, the understanding of the word "startup" has been distorted, and now it means business in the early stages of development - a company under 3 years old - but in essence the startup is not any business with this characteristic. Today there are many definitions of the term "startup":

· American entrepreneur, the author of a famous book “The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses”, well-known blogger in the field of high-tech business, Eric Ries (2011), defines a startup as an organization formed to create a product or service in conditions of high uncertainty;

· Aswat Damodaran (2012), professor of finance at business school of Leonard N. Stern at New York University, defined startup from a financial point of view, arguing that a startup is a firm whose value is entirely determined by its growth potential;

· As the defined by The American Heritage Dictionary, “A business or undertaking that has recently begun operation: grew from a tiny startup to a large corporation.” (Houghton Mifflin Harcourt Publishing Company, 2020);

· A section on a finance-oriented website called Investopedia.com, the definition is presented like this: a startup is a small company, founded by around 5 people, which are in the pursuit to develop a unique product and deliver it to the market. One of the first challenges for a startup, as suggests the internet article, is to gather the impression that the product is worth investing into (Fontinelle, 2020);

· The same internet resource, Investopedia, has a definition by Grant (2020). In his words, a startup is a company founded by one or more entrepreneurs, who all believe there is a special demand for the product the startup is making. One of the key takeaways is that a startup must be a young company, which is in its early business stage (Grant, 2020);

· Another definition is given by Business Dictionary. The dictionary suggests that a startup is the first stage in the life cycle of the company, in which the entrepreneur moves from the idea to financing, determining the basic (main) structure of the business, starting operations or trade (businessdictionary.com?, 2020);

· Finally, an infamous entrepreneur in USA's Silicon Valley, who has created lean startup movement, Steve Blank, defines a startup as a form of organization, which is formed temporary until the moment it finds a scalable business model and becomes sustainable business. As per his definition, a startup can be presented as a self-independent venture, as well as a new division inside an existing company (Blank, 2012).

Due to the fact that start-ups may vary drastically in terms of revenues, profits and employment numbers (Robehmed, 2013), there is only little consensus on a generally applicable definition of start-ups. However, it is commonly agreed on the fact that one key characteristic of a start-up is its ability to achieve significant growth - and as per Robehmed (2013), this great potential to grow unconstrained by geographical boundaries is distinctive for start-ups.

Accordingly, start-ups face a particularly high risk, requiring the acquisition of external risk capital (Carstens, J., Schramm, D.M., 2014; Leitner, K.H., Zahradnik, G., Dцmцtцr, R., Raunig, M., Pardy, M. and Mattheiss, E., 2018). Consequently, start-ups usually have a rather low survival rate, however, if they succeed, they may achieve an extremely high level of earnings (debitoor.it, n.d.).

Originally, the term was used to indicate just new activities with a very technological and forefront product in the IT sector. Over time this term has lost the sectoral restriction and start-ups may now occur in any industry as long as they display certain characteristics (debitoor.it, n.d.). Therefore, the Debitoor (n.d.) proposes the following key characteristics valid for start-ups:

· Temporariness: The start-up state is initial and transient; therefore, this term is valid only in the beginning stage of business. In this regard, Leitner, K.H., Zahradnik, G., Dцmцtцr, R., Raunig, M., Pardy, M. and Mattheiss, E. (2018) claim start-ups are no older than 10 years.

· Experimentation: Entrepreneurs use a `trial and error' approach in order to experiment optimal business model and strategy and to find the best way to enter the market. This procedure requires numerous tests in the market and respective adjustments (debitoor.it, n.d.).

· Scalable and repeatable: A start-ups' business model must be scalable and repeatable, and it must allow growth on a large scale (debitoor.it, n.d.).

Taken these typical start-up features into account, one can guess that the start-up state is a `passenger' - a test phase to find the elements of the winning strategy to conquer the market and expand on a large scale (debitoor.it, n.d.)

As a resulting remark for this chapter it is possible to conclude that most of the researchers and experts in the field of startups are having their own vision on what a startup are and which characteristics a new-found business should possess to be considered one. It may be due to that fact, that the term startup is still evolving. New business ideas are formed and with them there are new ways on how to organize the business. However, to follow up with the financing for startups a researcher is tasked to understand the general definition of a startup.

It can be possible to summarize the above definitions. A startup is a new-found business that is created with the idea, which is aimed to solve a specific problem. It does that by creating a new product or a new service with a sustainable fast-growing business model, which is founded with innovation and experimentation techniques. A business model should be scalable and repeatable, but unique and serving the specifics of a market. As can be pointed out for almost any kind of business equities, such as SME's or large corporations etc., a startup has its own life cycle. Defining the life cycle of a startup is important for the understanding of the corresponding funding and financing options for each stage. The following sub-chapter is focused on this exact issue.

2.2 Startup development stages or startup's life cycle

Given that the research on startup is still not mature, it can be sometimes misleading to see what startups really are, as can be seen from the previous sub-chapter's conclusions. The similar results appear to be when exploring the startup life cycle or, in other words, its development stages.

2.2.1 Product development and organization growth approaches

Generally, in the broad research, there are two approaches to interpreting a startup's life cycle. The first approach represents the life cycle for the company and the second approach represents the life cycle for the product. An analogy can be drawn between the life cycle of the company and the product life cycle. By developing a new product, the company aims to achieve a certain goal to satisfy the need for this new product on the market. Similarly, to the company's life cycle, a new product's life cycle includes start and end points, a limit on the financial resources needed to achieve the goals, and resource constraints. Thus, it can be noted that the life cycle of the company and the life cycle of the product are directly related, this connection, for example, can be explained by the period of time during which the product exists in the market from the moment of its creation to the moment of its decommissioning and contains several stages, the distinctive feature of which is the change of production growth in time. It is important to notice that the main difference between the life cycle of a startup and the life cycle of a company/product. A startup is focused on rapid growth, rapid market capture, and its life cycle is shorter than that of a company/product. Therefore, the following analysis will focus on the exact definition of a startup lifecycle.

As mentioned above, the peculiarity that distinguishes a startup from traditional companies is its life cycle. Today, there are several approaches to the distribution of life cycle stages. In the case of sources of Russian and foreign literature devoted to research of peculiarities of companies' development at early stages, such as reports by market analysts and consulting companies (EY and G20 Young Entrepreneurs' Alliance, 2013; RVC JSC and Deloitte CIS, 2017), scientists and researchers (Dutta, 2015), five stages of startups' life cycle are distinguished in a similar way: seed stage, start, early growth, expansion and late stage. Other authors and market analytics companies such as: (Dutta, 2015; Korshunova and Smirnov, 2015; Salamzadeh and Kawamorita, 2015; Wilson and Silva, 2013), provide their own vision on startup life cycle with less stages of 3 or 4. However, all of their visions are similar in a way.

It is important to investigate and focus detailed descriptions of startup development stages to better the understanding of startup funding and financing specifics. In the current section, there is a short extract from each of the researched articles on the topic of startups' development.

According to the already mentioned first international study of the successes and failures of startups Startup Genome (2019) - six stages of the startup life cycle have been defined:

1. “Discovery”

2. It is characterized by the discovery of a new idea and the creation of the first prototype of future product(s);

3. “Validation”

4. Concludes the testing of products on a selected sample of future consumers;

5. “Efficiency”

6. At this stage, the efficiency of consumers' use of the product is assessed, and necessary adjustments and additions are made. Bringing the product to a “ready for growth” condition;

7. “Scale”

8. Here the product is put on the market and is enabled for growth with the organization growing rapidly as well;

9. “Maintain”

10. Profit Maximization by increasing sales, maximizing market pressure through marketing and promotional efforts;

11. “Decline”

12. After the products in the market have "worked out" themselves, and the demand trend shows a stable downturn, do not revisit and update. At this stage the products are either terminated or transformed into new ventures.

The bestseller “The Lean Startup” by Ries (2011), defines the terminology for Lean Startup. It is defined as a lean manufacturing concept. According to the author, it is useful to have a scientific approach to build a growing business and avoid unnecessary costs. In the book, the author also touches upon some of the stages of a startup's lifecycle. In determining the life cycle of a startup, the author is focused on the "create-evaluate-learn" cycle. He defines seven stages of a startup's development:

1. The emergence of an idea;

2. Creation of a prototype and its approbation;

3. Product creation;

4. Market evaluation;

5. Sales and eventually evaluation of sales results;

6. Conclusions on sales results: mistakes, questions, suggestions, future ideas;

7. End of the product and a transition to a new idea.

In a book by Blank and Dorf (2012), the authors suggest that there are the following stages for startup development:

1. “Concept and seed stage”.

This stage is characterized by the presence of an unproven and often not fully developed idea of the project or product for creation. This stage is also a beginning for the first thought about the business model and sales channels. The problem a startup will solve and the target audience are starting to be defined. Justifications for the potential profitability of the business concept can already be presented. The stage then continues with the verification of the business idea and business model. For this purpose, marketing research is conducted, trial sales are launched. An investor base is searched for and it is high time to please an investor into believing the project will succeed in the market so it is worth an investment (Blank and Dorf, 2012)

2. “Product development”

As Blank and Dorf (2012) suggest, the following stage continues with a change from lots of planning to a hard work process. All departments in a startup start to focus on their own tasks. While marketing starts to focus on target audience and test the product on picked groups, development team begins with full engagement bringing a product to life. Product development in this case expands into a workflow, which can be a “waterfall” (Figure 1), a “spiral” or lean startup methods of organization described in a book by Ries (2011).

Figure 1. "Waterfall" model for product development

Source: Blank, S.G. and Dorf, B. (2012) The startup owner's manual. Pescadero, California: K & S Ranch. Available at: http://books.google.com/books?vid=isbn9780984999309

3. “Alpha/Beta Test”

At this stage, first version of a product is going through cycles of testing by a selected group of participants and fixing by the engineering team (Blank and Dorf, 2012). As for the other departments: marketing team starts with branding activities, at the time when PR department signs contracts with long-term advertising channels.

This stage extends into the following sub-stages:

1.1. Working prototype. At this stage a product or a program can display a basic functionality, which is required to demonstrate the general idea of the product;

1.2. Alpha version. A version, which is suitable for testing by company employees and developers. In the course of testing, system errors or product key weaknesses are detected and eliminated. In the case of a rather flexible operating schedule, alpha version can still be completely reworked if there are too many key weaknesses in the product. This might be considered a breaking point for product development. As after this stage, it may be harder to rework the product.

1.3. Closed beta version of the product (sometimes referred to as “private beta”). This is a version of a product, which is available only to selected participants of the potential target audience. This stage is aimed to prepare the product for open (freely consumer available) testing;

1.4. Open beta version - a trial version, distributed freely to get feedback from a wide future user base. This stage requires a lot of resources as the amount of feedback from the testers may be increased dramatically.

4. “Product Launch and First Customer Ship”

As the title suggests this stage makes a transition to real sales channels activity after the product v1.0 is launched. The marketing team in this case starts aggressively spending budget to boost the first sales and gain customer awareness of the product. A company usually requires additional funding within this stage, as the funds received at early stages may have run out at that point.

Another, much simpler approach is taken by Crowne (2002). The author is discussing the problems of startups, which potentially lead to fail. While discussing, the author focuses on four stages of startup development:

· Startup - everything since the birth of an idea up until the first sale;

· Stabilization - this phase starts with the first sale and goes on until the product is ready to be sold to any new customer without much reworking or restructuring;

· Growth - after the product is stable enough to be sold without additional work from the development team it is then growing up until there is no more room for growth or expansion of a market share. During this phase it is more likely an IPO can happen compared to other phases;

· Maturity - the final step, which implies what once was a startup is now a mature organization. It is an organization, which has stable sales channels and has all the processes inside the company perfectly tuned so that every employee knows what he or she should do and how to act. Such a company is ready for unexpected risks and has already expanded well enough as the product allowed to.

As suggested by Salamzadeh and Kawamorita (2015), there are three stages of startup development as shown in Figure 2 below:



Figure 2. Startup 3-stage lifecycle model.

Source: Salamzadeh, A. and Kawamorita, H. (2015) Startup Companies: Life Cycle and Challenges. Available at: https://www.researchgate.net/publication/315308370_Startup_Companies_Life_Cycle_and_Challenges (Accessed: 20 March 2020).

The authors have described all three stages in their article. The first stage is an expansion from an idea of an entrepreneur to a business establishment. An entrepreneur is investing his time and money actively during this stage to make a solid positioning for the idea for investors and allow the growth of the idea in the future (Salamzadeh and Kawamorita, 2015). As the authors mention, this stage is a time when investors are essential for a success of a future business. Second stage is a shift from a one-person approach to a teamwork, which is focused on expanding the business by attracting investment. It is a time when a company needs assistance of business coaches or accelerators and incubators. The final “Creation” stage is described as a final move from a profitless business establishment to a business which finally sells, has employees and has a fair share in a market. An elaboration on the process is detailed in Salamzadeh et al. (2015). The end of this stage is characterized by a legal establishment and a stability in business.

In the article by Russian researchers Korshunova and Smirnov (2015) there is a research about startup accelerators. The authors have composed 3 stages of startup development, based on 4 other articles by other Russian researchers:

1. Pre-seed. A startup has an idea and there is no clear plan for its implementation. Beginning of team formation with minimum number of participants. At this stage, brainstorming and creativity of the idea carrier is important.

2. Seed. A full understanding of the startup and its content. The startup team is formed and a working prototype of the product appears. The startup and its team are at the stage of developing a business plan and actively seeking investments.

3. Post-seed. The team is formed, the business plan is written. The product has found its consumer. There is a steady profit. At this stage, the organizational structure is being formed.

Kotler and Keller (2016) do not focus exactly on startups, but rather on innovative products. In their book, the authors have a chapter about new ways of doing business and new products. There is a specific stage-based approach for product development decision process in their book (Figure 3), which consists of 8 stages in total. The following Figure 3 presents all of the stages:

Figure 3. The New-Product Development Decision Process.

Source: Kotler, P. and Keller, K.L. (2016) Marketing management. 15th edn. Boston: Pearson (Accessed: 20 March 2020).

Throughout the review of a suitable literature there has been noticed a similarity on some of the works. The authors Kotler and Keller (2016) are focused specifically on marketing the product and not on the organizational structure. This approach is similar to the one in the works by Ries (2011) and Startup Genome (2019).

However the other approaches by Blank and Dorf (2012) or Crowne (2002) are based on the development of a startup as a company. The similar approach is taken in the works of Salamzadeh et al. (2015) and Korshunova and Smirnov (2015). The authors have different objectives as for their research and thus, it impacts the way they perceive the lifecycle of a startup. In order to meet the objectives of the current research, another approach is needed to be searched in the published. The understanding of startups' financing and funding practices with the connection to a startup's lifecycle would help the current research, and that exact understanding comes with the review of the articles in the next part of this chapter.

2.2.2 The connection between startup funding/financing and its development stages

The articles and reports below have supported this research with the idea of possible connection between startup's development stages and possibilities of funding and financing. The research focuses not only on business or product development as a phenomenon, but rather on a connection between financing and funding opportunities and a startup's growth stages.

In the report by EY and G20 Young Entrepreneurs' Alliance (2013), there is a wide discussion on startups and funding they can receive in different countries, which aligned with the given topic of this thesis. In the report, the authors suggest there are specific times in a startup's lifecycle, where a particular investment is more common to be used (Figure 4), however, this specifically will be covered in the latter part of this thesis. As for just the given startup development stages, the report suggests the following:

1. Emerging stage, (divides into):

1.1. Pre-seed

1.2. Seed

1.3. Start-up

2. Rapid growth

3. Expansion / market leader

Figure 4. Funding of startups on different stages of startup development.

Source: EY and G20 Young Entrepreneurs' Alliance (2013) The EY G20 Entrepreneurship Barometer 2013. Available at: https://www.ey.com/Publication/vwLUAssets/The_EY_G20_Entrepreneurship_Barometer_2013/%24FILE/EY-G20-main-report.pdf (Accessed: 5 March 2020).

Following up on the previous report, in the article by Dutta (2015), there is a continuous discussion, which also mentions research results from EY and G20 Young Entrepreneurs' Alliance (2013), concerning financing an innovative company. The author has a small mention for a startup' development stages in the early chapters. The four proposed stages are: seed, startup, early growth and expansion. The author focuses then on the financial problems of startups in general and does not show the connection with financing possibilities on different stages, therefore does not contribute to the latter stage of this thesis.

In the work of Wilson and Silva (2013) there is a schema (Figure 5) for a start-up's lifecycle, which is structured in a way similar to the one in the research of EY and G20 Young Entrepreneurs' Alliance (2013).

Figure 5. “Startup lifecycle with stages of financing”.

Source: Wilson, K.E. and Silva, F. (2013) `Policies for Seed and Early Stage Finance', SSRN Electronic Journal. doi: 10.2139/ssrn.2392929

The researchers are focused to construct the lifecycle of a Startup tied to its profit and financing options. The latter will be discussed in the next step of this research, however, as for Startup development “phases”, the authors suggest 4 main stages, with almost each of those consisting of smaller ones, making it in total 8:

1) Early phase

a) Seed - birth of an idea

b) Start-up - first business developments

c) 1st stage - launch of first sales on a market

2) Expansion phase

a) 2nd stage - rapid growth in terms of market capture and sales

b) 3rd stage - “Standardization and Internationalization”

c) 4th stage - preparation for an IPO

3) IPO launch - public stock market entry

4) Going private - closed shares

The research conducted by RVC JSC and Deloitte CIS (2017) is a complex insight into innovative companies and processes inside those. According to the authors, there are five stages of startup development, which are defined similarly as in the research by Dutta (2015). The stages are directly tied to the possible funding options and profit levels at each stage as it is displayed in Figure 6.

Figure 6. “Lifecycle of an innovative company with categories of investors.”.

Re-compiled and translated by the author from source: RVC JSC and Deloitte CIS (2017) `Методическое пособие и практические рекомендации по структурированию сделок, применению механизмов мотивации ключевых сотрудников, в том числе в зарубежных юрисдикциях, стратегии и тактике выхода на международный рынок'. Available at: https://www.rvc.ru/upload/iblock/849/mp_rvc_deloitte_2017.pdf (Accessed: 5 March 2020).

As it is stated from the Figure (Figure 5) in the research of RVC JSC and Deloitte CIS (2017), the authors suggest 5 stages for Startup development:

1. Seed stage

2. Startup stage

3. Early growth

4. Expansion

5. Late stage

2.2.3 Framework of knowledge for startup lifecycle definition

Combining all of the mentioned and discussed above methods for structuring the steps in a startup's lifecycle it is possible to create a summary or a “framework of knowledge” in a form of a table (Table 1). The table below groups the authors according to the suggested approach at defining startup's lifecycle, shows how many stages were proposed and briefly covers the stages. Each of the authors are included in the same order as they were mentioned in the work.

Table 1

Framework of knowledge for startup lifecycle definition

Approach

Authors of articles the references for all articles of all mentioned authors are located in the reference section.

Product-based	Startup Genome (2019)	6	Discovery, validation, efficiency, scale, maintain, decline
Product-based	Ries (2011)	7	Idea, prototype, product creation, market evaluation, sales, conclusion on sales, end of the product
Organization and development-based	Blank and Dorf (2012)	4	Concept and seed stage, product development, alpha/beta test, product launch and first customer ship
Organization-based	Crowne (2002)	4	Startup, stabilization, growth, maturity
Organization-based	Salamzadeh et al. (2015)	3	Bootstrapping stage, seed stage, creation stage
Organization-based	Korshunova and Smirnov (2015)	3	Pre-seed, seed, post-seed
Product marketing-based	Kotler and Keller (2016)	8	Idea generation, idea screening, concept development and testing, marketing strategy development, business analysis, product development, market testing, commercialization
Advanced approaches, based on the connection with financing and funding
Business growth-based with a focus on financing through stages	EY and G20 Young Entrepreneurs' Alliance (2013)	5	Emerging (pre-seed, seed, startup), rapid growth, expansion / market leader
Business growth-based, concerning general financial problems	Dutta (2015)	3	Seed, startup, early growth, expansion
Business growth-based with a focus on financing through stages	Wilson and Silva (2013)	4(8)	Early phase (seed, startup, sales launch), growth, “Standardization and Internationalization”, preparation for an IPO,
Business growth-based with a focus on financing through stages	RVC JSC and Deloitte CIS (2017)	5	Seed stage, startup stage, early growth, expansion, late stage

2.3 Funding and financing of startups with a concern for each stage of lifecycle

All of the previously mentioned definitions of startup's lifecycle have different approaches; therefore, it was important to acknowledge all of them, but hard to choose any as “the right” one. To be unbiased and at the same time theoretically correct, for this research it was decided to follow a simpler, three stage approach, which focuses on a startup's life cycle concerning risk levels and income for three stages: Seed, early growth and late stage(maturity). The decision was based on why we look into startup development stages initially - understanding of startups' funding and financing options and practices.

To follow up, for each of these stages there is a corresponding level of risk for a startup to go bankrupt, lose investor's trust or simply shut down (RVC JSC and Deloitte CIS, 2017).

The research of RVC JSC and Deloitte CIS (2017) greatly contributes to the current research paper by introducing the detailed outlook on financing options for startups, concerning risks of failure. For seed and early growth stage risk is high, when a startup has just crossed the break-even point and starts earning money. The medium risk can be associated with a time when a startup is in early growth stage after it already makes profit and enters the late growth stage, when the rapid development moves to a moderate one. A low risk corresponds to a late stage (RVC JSC and Deloitte CIS, 2017). Taking into account all of the previously reviewed literature in this chapter and remarks made by RVC JSC and Deloitte CIS (2017), now, there will be peculiarities of the life cycle stages of a startup:

1. Seed stage

In the early stages of the life cycle, companies tend to show unstable or negative cash flows and have no operating history and no security or backup funds. Consequently, the risks associated with investing in start-ups at this stage are generally catastrophic. Usually capital in such companies comes from relatives, friends or other people through private investments, crowdfunding or business angel investments, i.e. from those investors who believed in the project's development prospects and are ready to bear the risks of bankruptcy together with the owner.

2. Early growth stage

At an early stage, companies form a market for their products and services and begin to profit from their activities. At this stage, many more financial instruments can be used than at the first stage, attracting sources such as bank lending or venture capital. However, banks are not in a hurry to lend to start-ups at this early growth stage. At the same time, for the company itself, the issue of obtaining borrowed financing in the course of implementing a strategy of rapid growth is urgent. Therefore, public and private venture funds, corporate accelerators, crowdsourcing and crowdsourcing platforms are frequent sources of business financing at this stage.

3. Late growth stage (Maturity)

Entering a stage of expansion or a late stage of maturity, the company is able to meet financing needs through internal cash flow from operating activities, bank loans, private equity funds. At this stage, the Startup can turn to the capital markets for financing through bond issues, as well as start preparing for the public sale of its shares, e.g. going public with an IPO(ICO). Entering the open market will help companies finance their strategic goals, create opportunities for development, sell their shares by the owners, etc. At this stage, capital growth includes financing that will allow companies to further expand (RVC JSC and Deloitte CIS, 2017).

Each stage of a startup's life cycle is characterized by certain sources of funding. The main factors, which influence the choice of one, or another source of funding can be:

· the amount of funds required;

· purposes for which financial resources are needed;

· the industry in which the startup operates.

According to RVC JSC and Deloitte CIS (2017), in most cases, at the seed stage of business existence the volume of required investment is small in contrast to the subsequent stages of early and late growth. The research suggests that the goals and targets of financing for startups or “innovative companies”, along with the needed amount of financing depends on startup's lifecycle stages (Figure 6, Table 2).

The industry in which a startup operates influences the choice of a supporting source of funding, which should be interested in a specific industry. In addition, actively developing and growing industries are considered as more effective potential investments, as they have higher chances for startup survival (RVC JSC and Deloitte CIS, 2017).



Table 2

Difference in funding goals and required amount of funds for seed, early growth and maturity stages of a startup's lifecycle

Startup lifecycle stage	Seed stage	Early growth stage	Late growth (maturity) stage
Funding goals	R&D, prototyping, business model development, product creation, trial production and testing	Full scale production launch, aggressive marketing and promotion	Marketing, entering new markets, product advancement, IPO preparation, mergers and acquisitions
Amount of funds required	< $1 Mil.	< $5 Mil.	> $5 Mil.

2.4 Funding and financing practices for different stages of a startup's lifecycle

The sources of funding for startups can be both commercial and non-commercial. Non-commercial sources include public and private programs and charitable foundations. They fund startups of high social importance at any stage of the life cycle. An example of a public support for a startup can be government funds, which can be in a form of subsidies or grants. Usually, government funds are interested in openly supporting am many small business, including innovative startups, as they can, as their own funding out of government budget might depend on their performance (USAGov, no date).

Under the conditions of uncertainty and high risk of bankruptcy, the growing unmet demand for money to finance innovative business is being met by new entities and investment providers accumulating private and public sources of finance, in addition to commercial banks and entrepreneurs themselves (EY and G20 Young Entrepreneurs' Alliance, 2013; RVC JSC and Deloitte CIS, 2017; Wilson and Silva, 2013). These include:

Venture funds. A venture capital fund is a commercial financial institution that invests in innovative, high-risk projects at an early stage of development and expansion for profit. The investors in this case are very risk averse: their investment is high-risk and they require high-returns (Chen, 2020).

Corporate accelerators, corporations, state companies. Corporate Accelerators is an organization which aims at intensive development of companies through mentoring, training, financial and expert support in exchange for a share in the capital of the company being accelerated. The accelerator's task is to increase the capitalization of portfolio companies in a short period of time (usually less than six months) by attracting new rounds of investment or a multiple growth of key indicators (Kohler, 2016). Usually the business model of an accelerator is based on exit from the capital of portfolio companies with high multipliers, so most accelerators work with early stage technology companies (Ballesteros-Ruiz and Cardenas-del Castillo, 2019; RVC JSC and HSE Business Incubator, 2017)

Business angels. Typically, business angels are individual investors who, unlike venture funds, invest their own money in a small amount compared to other types of investors and mostly invest in companies at an early stage of development, so they are the most valuable among other types of investors. For these investors the mentioned activity is not the main one. In addition, business angels investing financial resources in the company do not require current income, their main goal is to maximize the value of the company and to generate income from the resale of business shares in the company in the future (Block et al., 2019; debitoor.it, 2020)

Strategic investors. In contrast to business angels, strategic investors can be both individuals and legal entities who buy stakes in companies mainly at late stages of growth. The sale of an entire stake or company to a strategic investor is usually the final stage of the relationship between the investor of the previous round and the innovative company. An acquisitive company that is already strong and yet has significant potential can bring significant synergetic benefits to the buyer. If, in the course of an IPO, shares are bought for dividends or value growth, a strategic investor acquires an interest in the company to gain control of the company and expand its business (Carr, Kolehmainen and Mitchell, 2010; Furtado, 2016).

Private equity funds. These are specialized companies whose direct investments are made in exchange for a share in the authorized capital of at least 10%. Acquisition of a share in the fund allows to have a representative on the board of directors and participate in the management of the company. Private equity funds are established, as a rule, for three to five years, then closed after the sale of all shares in which the fund invested, and then the distribution of profits. The specific of their activity is to finance companies at late stages of growth.