When you launch a startup, there are many aspects to consider. Especially in the area of startups, every step has to be carefully considered, because inexperienced founders often fail due to some of the basics of business. Even if there are coaches who foresee and help to circumvent the most common mistakes made by most startups, there is one issue that also plays a role in the most sophisticated business model – the question of financing.
“Rule No. 1: Never loose money. Rule No. 2: Never forget rule No. 1” – Warren Buffett
Many startups can stick this rule to their office doors, because it can take a while before a young company earns their first money. This is the normal process of starting a business, but many forward-looking startups have often run out of steam by the time the business is up and running.
The following types of financing should therefore be familiar to founders in order to keep themselves afloat in the first few financial years.
Most of the company’s started with the three big Fs: “Friends, Fools, Familiy”. It is not uncommon for the founders’ friends and relatives to provide initial support, but this method requires further money from other sources to be paid quickly. However, self-financing is not a shameful way to start a company. This way of founding a company is called bootstrapping. Bootstrapping is the financing of your own company without any outside capital.
Even though it is difficult to keep afloat in the first few months without any outside funding, this type of corporate financing has a big advantage: since there are no investors, all business decisions are entirely in the hands of the founders. Companies can fully commit themselves to their vision without any intervention from the investor side.
2. Business Angel
It doesn’t always have to be the big funding pot that startups have to look for when starting a business. Especially inexperienced entrepreneurs need not only money, but also a mentor who will support them in difficult decisions with advice and action. Startups often receive this kind of support from so-called business angels. Business angels are often wealthy private individuals who support innovative companies. In doing so, they support the aspiring entrepreneurs not only with the appropriate capital, but also with their know-how. Many problems can be bypassed in the first years by the experience of the Business Angels.
Business angels usually invest large portions of their private assets and in return, they receive shares in the start-up company.
3. Venture Capital
Investing in a start-up always involves risks. Since startups often operate in a new, emerging market, investors do not know how the innovative business model will develop. In spite of all this, the investors are placing their money on particularly promising ideas and visions. Venture capital is a short-term equity investment in start-up companies that have not yet been listed on the stock exchange. The supported companies are often characterised by a very high potential for success and innovative, groundbreaking ideas.
Most of the time, financing is done by venture capital in the first or second stage of a start-up.
4. Startup Funding
Germany promotes its startup culture; in hardly any other country are there as many opportunities to promote its idea as in the Federal Republic of Germany. In the meantime, there are so many funding pools that many founders find it difficult to keep track of them. To make this possible, there are databases from the Ministry of Economic Affairs as well as sites such as Gruenderberater.de, which provide the appropriate financing instrument for the respective business idea.
Some examples of funding would be:
- Gründungszuschuss der Agentur für Arbeit
- Förderung unternehmerischen Know-hows
- ERP-Gründerkredit – StartGeld
- ERP-Gründerkredit – Universell
We live in an age of swarm intelligence. Wikipedia carries the collective knowledge of the network community, databases and forums are supplemented and maintained by the community. But even when it comes to financing good ideas, the masses of people are also dependable.
With portals such as Kickstarter and Co. crowdfunding becomes a widespread method of corporate financing. There are four models of how the crowd can get involved. In addition to classic crowdfunding, there is crowd investing, crowdlending and donation-based crowdfunding. However, you will need to evaluate which method is most suitable for your business model.