Banks and startups: an ever evolving relationship

By Margaux Cervatius - 01 November 2021

Startups have long felt misunderstood by banks, and vice versa. Banks offered few, if any, products suited to startups. These young ventures, therefore, had no choice but to turn to VC funds or business angels. In addition to providing funding, they were often knowledgeable about the startup ecosystem and could offer valuable advice.

However, the relationship between banks and startups is starting to change. Banks are now showing a real interest in the startup ecosystem. They want to get more involved in the development of startups and support them in shaping tomorrow’s economy.

Why banks and startups got off to a rocky start

Banks and startups have long had difficulty understanding each other due to their fundamentally opposed natures. On the one hand, startups are young companies that focus on growing rapidly. Their priority is not to become profitable, but to disrupt a market with an innovative technology or product. Startups will initially spend a lot of money on R&D, recruitment, and marketing (among other things) without generating any revenue. It often takes several years for them to find a stable business model and become profitable.

On the other hand, banks are wary of startups. First of all, when it comes to loans, startups present a high credit risk. It is estimated that 90% of startups go bankrupt and only 30% of them manage to reach profitability. This makes it difficult for them to attract the interest of banks, which do not see them as serious or relevant customers.

A growing awareness

Challenger banks like Qonto or Tide then appeared on the market to offer banking services adapted to startups. Little by little, traditional banks started to reconsider their stand. Indeed, in the long term, startups can represent an important source of revenue. Startups are a breeding ground for employment, growth and competitiveness. Some of them are met with great success and end up joining the “unicorn club”.

Meanwhile, public banks have set up many programs to help finance startups. This has played an educational role, encouraging private banks to become more open to startups. As their interest in the startup ecosystem kept growing, several large banks even created startup incubators and accelerators. For example, Crédit Agricole launched its accelerator network called Le Village by CA in 2014. The network now has around 30 locations or “villages” across the country and works with more than 1,000 startups. The aim is to support startups and guide them to success so that they can become high-potential customers.

Crédit Agricole’s network of startup acceletors, Le Village by CA.

Helping startups in their search for funding

In their first years, startups need a lot of funds to finance their development. Banks can therefore guide them in this search. Despite the credit risk mentioned above, banks can offer debt financing to the least risky companies. Debt has the advantage of limiting the dilution of the entrepreneurs’ stakes. It can also increase the valuation of the company before a funding round.

In 2019, Raise and Crédit Agricole Île-de-France launched the expansion loan. This unsecured equity loan is intended for startups with annual revenue of between €1m and €10m. Applications are examined by a committee, which gives an answer within a few weeks instead of several months, as is common with traditional banks. The process includes a rating by Early Metrics to assess the credit risk.

In addition, banks can assist startups in raising equity. Thanks to their network, they can put entrepreneurs in touch with investors. Silicon Valley Bank even uses its network as a selling point. The American bank prides itself on having developed a vast network on the back of its forty years of experience in the tech market. It offers to connect entrepreneurs with VC funds, accelerators and large companies. Nordea, the leading banking group in Scandinavia, is another example. This bank organises “speed dating” events between startups and investors.

Encouraging interactions between startups and investors on Nordea’s booth at the conference Slush.

Beyond financing

However, it would be a mistake to reduce the relationship between banks and startups to the search for funding. While financing is the key to the survival of startups, banks can offer other equally important services and products.

Flexible, time-saving tools

Banks can offer products tailored to the needs of startups. This can take the form of an online platform to simplify banking. For example, J.P. Morgan‘s Chase Connect platform allows clients to manage multiple accounts and monitor their cash flow from a single dashboard, anywhere, anytime. Thanks to this, startups can not only enjoy more flexibility but also save time on administrative tasks, allowing them to focus on innovation.

Adapted insurance products

Banks may also offer insurance products. For instance, some startups need expensive high-tech equipment for their business. An equipment malfunction or any incident could have a catastrophic impact on their development, making insurance crucial.

Another type of insurance that can be relevant to startups is key person insurance. It protects the company in case of loss or unavailability of a highly valuable person, such as the founder.

External expertise

Bank account managers can also act as advisors to startups. For some entrepreneurs, this may be their first experience running a company. Therefore they need expert advice. Account managers can advise them on a variety of key issues, such as regulations and anti-money laundering measures. They can also put startups in touch with trusted service providers (lawyers, accountants…). As the startup scales in terms of team and scope, it may need advice on setting up profit-sharing plans for its employees.

Finally, the bank can be a significant ally for the international expansion of a startup. The bank can offer an international account to facilitate payments in different currencies. It can also assist the startup in setting up shop abroad thanks to its local branches and agencies.

More than just credit providers, banks now support startups on their path to growth and profitability. Despite the creation of dedicated innovation teams, it can be difficult for banks to spot the gems among all the projects presented to them. Early Metrics can help banks identify the most relevant startups and evaluate their potential. In this way, banks can fully contribute to innovation and tomorrow’s economy.

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