Startup financing: How to raise capital for your business idea

Startup financing: How to raise capital for your business idea

Friday, 9 April 2021

How do you decide on a funding strategy?

 

You finally found THE product idea that will catapult your startup into the next Unicorn? Congratulations! You’ve cleared an important hurdle. However, the next hurdle that awaits you might cause you much more concern.

Small startups, in particular, say they have great difficulty convincing their investors of their business idea. Accordingly, the financing of startups remains one of the central challenges for founders.

 

Basically, there are two possibilities:

 

  1. You or your social environment have enough savings to finance the startup
  2. You turn to professional financiers

 

Logically, the choice of the right financing option is not an either/or question. Many forms of financing you can freely combine with each other. This is also shown by the PwC Startup Study: more startups are being mixed-financed every year, and in 2018 the number was already at 77%.

Again, as always, there is no one-size-fits-all solution. The appropriate type of financing depends on many factors and therefore has to be weighed up individually for each project. Last but not least, the chosen form(s) of financing can have a strong impact on the success of the company.

The first question you should ask yourself when looking for financing options is: am I willing to give away shares of my company? If the answer is no, you can already cross business angels, venture capital, and innovation accelerators off your list.

 

Bootstrapping

 

A 100% self-financed startup is of course the dream of many founders. The independence that this option offers is unbeatable. The founder retains complete control over the company and does not have to make any compromises with shareholders or lenders.

In addition, many welcome the fact that one is far more motivated by self-financing to bring the company to success, after all, it is about your own money.

However, only 10% of young companies use equity capital as their only source. And there are reasons for that. Realistically, the majority of founders only have a manageable amount of equity capital at their disposal, which is usually between €5,000 and €50,000.

Accordingly, it is also unlikely that the company will experience rapid growth, after all, large investments in personnel, product development, etc. are hardly possible. As a result, competitors can quickly push a self-financed startup out of the market.

And last but not least, the personal risk is of course a big disadvantage for the founder himself. Should the startup fail (which is statistically anything but unlikely), the founder loses his personal assets and in the worst case could also struggle privately with financial problems. This risk enormously increases the pressure and stress level of the founder during the development of the company.

 

financing, capital, bootstrapping, self financed

 

Family & Friends

 

Well, in the best case you are not a loner and have a social environment that is willing to help you out. Family and friends are typically the first to hear about your idea and are involved in the process from the beginning. Last but not least, they are more likely to take you up on your offer because of your private relationship.

Ideally, this means that several private investors will participate in your company, so that not only can a higher level of financing be achieved, but also the financial risk is spread over several items.

It would be good to have a plan B and rely on more than just family. A casino with a variety of games and bonuses will help you with this. Icecasino bonuses and promotions can be important incentives to increase your income. Skillfully using them, you can get additional benefits and opportunities to increase your finances.

Typically, friends and family are willing to provide the money as an interest-free loan. No other option can offer you this.

However, as already mentioned: Failure is not the exception but the rule, 9 out of 10 startups fail within the first 3 years. You should also make this clear to your investors and clearly secure yourself contractually. Otherwise, in the worst case, you will lose not only your company but also your private relationships.

 

Crowdfunding

 

“Many little people doing many little things in many little places can change the face of the world.” (African proverb)

 

This is the principle on which crowdfunding is based. In order to reach a sufficiency of capital, there are various crowdfunding platforms on which the startup idea is presented to a broad audience. An additional advantage: the private individuals on these platforms are less interested in economic profit than in supporting the idea. As a result, political, charitable, and sustainable projects are particularly successful. But sympathy can also be decisive.

In addition, crowdfunding can be used to finance not only companies but also private causes or non-profits.

 

Most popular crowdfunding platforms

 

 

crowd, crowdlending, investing, startup financing

 

Fundings

 

The following options are additional financial help, which, however, often includes many specific conditions and often also effort. However, a grant or the prize money of a startup competition doesn’t replace a proper financing strategy but can be a way to push your startup further.

 

University-related funding

 

Since 83.9% of all founders have a university degree and also many already build up their business during their studies, it is logical that many students and graduates are awarded grants.

One of the best-known subsidies is the Exist-Gründerstipendium with a monthly grant of between €1,000 and €3,000. However, this is obviously not so much a grant for setting up a business, but rather a means of securing a living and grants for material expenses and coaching.

Students, graduates, and employees of Bavarian universities can also apply for the Flügge-Programm, which includes a monthly payment of €2,500.

A detailed list of German start-up grants can be found on the Gründerplatform website.

 

Start-up competitions

 

Participation in start-up competitions is another way to obtain simple financing without many conditions. Here, too, the grants are usually in a smaller size of a few thousand euros. Again, there is a huge range of local, national, and international options.

However, winning such a contest offers another key advantage: attention. Many of these competitions are intensively followed by the startup industry and especially the winners but also participants attract the attention of capital providers, coaches, or mentors.

 

A small selection of foundation competitions

 

 

crowd, financing, startup, capital, swimming, mvp, investing

 

Bank Loan

 

Now for the darling of the startup scene: loans are the main financing source of about 64% of startups. This method is particularly suitable for larger purchases and investments. Typically, the bank grants sums between € 25,000 and € 300,000.

At first glance, this variant offers many advantages: the loan repayment proceeds according to a precisely defined plan and the bank does not receive any company shares or co-determination rights.

Precisely because of this, the problem is to first gain the bank’s trust. Especially with high-risk business models, banks have little interest in granting a loan. Therefore, a professionally prepared business plan, good preparation, and private collateral are prerequisites for convincing the bank.

 

Crowdlending

 

Crowdlending is a subform of crowdfunding and is also based on the power of the crowd. The loan via the crowd is also called P2P (peer to peer) or P2B (peer to business).

Just like a bank loan, the borrowers pay back the sum with interest within the agreed time. However, the difference is that no bank decides whether to grant the loan.

Nevertheless, there are hurdles to safeguard the lenders: the platforms through which the crowdlending process takes place check each loan application and assign it a risk class and an interest rate.

Only after the application is accepted, the individual investors make small (or large) contributions to the loans. After enough lenders are willing to invest, the entire loan is disbursed.

 

crowdleding, crowd startup

 

For all of the following methods, your startup will only receive capital if you are also willing to cede company shares and possibly also co-determination rights. But here, too, the requirements and demands are high. That’s why good preparation and professional strategy planning are everything. Read our blog post on MVP benefits to learn how an MVP can help you convince investors.

 

Venture Capital

 

Venture Capital (VC), or Risk Capital, is the financing of a startup by the fund of a company. This type of financing can quickly award you several hundred thousand up to several million euros. In return, VCs expect a percentage share in the company, but also co-determination and control rights.

Consequently, VCs are able to exert a strong influence on the company. In addition, they exert strong pressure to drive up profits. This is because their goal is not a long-term collaboration, but a quick exit. Therefore, it is not uncommon for the VC’s goals to deviate greatly from the VC’s own.

To guarantee a successful VC deal, a lot of negotiation skills are required. Otherwise, rash decisions can lead to too many company shares being exchanged for too little capital.

 

Business Angels

 

Business angels are private individuals who invest their capital in startups. Not infrequently, angels are themselves entrepreneurs who have brought one or more startups to success. In addition to capital, they also offer their startups expertise and contacts from their network. Their invested capital usually ranges from 20,000 to several hundred thousand.

To find the right business angel for your project, you can contact the Business-Angel-Netzwerk Deutschland.

But: just like VCs, Business Angels ultimately are looking for a profitable exit.

 

Incubator & Accelerator

 

Both variants offer founders many opportunities, but above all consulting services and, in some cases, financing. However, start-ups from accelerator or incubator programs also have a significantly higher chance of survival.

 

Crowdinvesting

 

All good things come in threes. Crowdinvesting is another crowdfunding variant. However, unlike crowdlending, the investors receive financial compensation such as a share in profits. However, the individual investors do not get any say in the matter, so the company can operate independently.

The major disadvantage of this financing method is the disclosure of sensitive details. As part of the crowd investing campaign, the entire financial plan must be published. So consider carefully whether it is worth the risk and trading capital for data makes sense for you.

 

Conclusion

 

Before you approach potential investors, you should put up a detailed financing strategy. These considerations will allow you to approach a small number of capital providers instead of trying your luck with a large number of possibly unsuitable capital providers. Just because you have a large number of financing options available to you does not mean that every one of them is suitable or beneficial for your company.

And above all, don’t sell yourself short. Consider carefully whether and to what extent you are willing to give up company shares or even co-determination rights. The search for financing can be long and arduous. But don’t let it demotivate you and don’t exceed your own limits.