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30. November 2021
Start up Knowledge

Startups and financing - Which funding is the right one?

Foto: Adobe Stock by Good Studio

Text: Sabrina Harper
Foto: AdobeStock

Funding programs, business angels or venture capital can turn a one-person company into a business with momentum. In this article we will explain which funding options are available and how to convince potential investors.

Anyone who wants to start their own business should also think about financing. There are several ways to raise capital. The most convenient one is arguably just having the money. Everyone with a pretty empty bank account but a great idea doesn't have to bury the dream of their own startup right away. There are several options for funding to make your own startup solvent.

Crowdsourcing

All founders need to ask themselves how they want to get funded. Each funding channel has its own rules and dynamics. Many fresh startups work with equity or crowdsourcing first. This means people are asked for donations on platforms like, for example, Startnext or Kickstarter. In return, donors might win prizes, or they are named or presented in the product. Crowdfunding campaigns always have a limited runtime and a certain sum as a goal. One example is the online game Talk to me. The creator, Victoria Schrank, developed the game to teach conversational strategies for discussions with conspiracy theorists in a playful way. To further develop the content, she launched a crowd sourcing campaign. She raised about 8,000 euros and was therefore able to finance the next development stage of Talk to Me. For media startups, a crowd sourcing campaign is often a first step into monetization models. Convincing investors right at the start is difficult. Dennis Gecaj knows this and has already founded several social media startups: "I founded a startup called Pyck a few years ago with two friends from the co-working space, Open Space. The target audience was young people. On the platform, you could ask questions and the community voted on them. We had good engagement numbers, a lot of growth and still didn't find any investors. We had a few pitches, even to big angel investors. Social products simply have a hard time getting funding in Germany. From my own experience, I know that FinTec and Software as a Service solutions are more likely to convince investors.

 

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Fundraising as described above takes an average of six months. It is best if at least sufficient money is raised during this time to enable the startup to survive for another year. However, founders should not wait another year until the next campaign. At the latest after seven months, a new fundraising should happen or an alternative source of funding should be found. In this way, business operations can be maintained.

Subscription models and memberships

Another way to involve the community is through subscription models or memberships. With subscription models, customers pay for the content, for example a traditional newspaper subscription. Membership models focus more on the community idea. Some of the content is made openly available. Ideally, users like the product so much they are willing to pay for additional exclusive content or features. One example is the startup Kopftuchmädchen. It is dedicated to fighting the stereotypes of women wearing headscarves. To do this, they run a YouTube channel and provide regular information on Instagram. All of this is accessible for free. Tied to this are community meetings that involve buying tickets to the event. Unfortunately, in very few cases, neither subscription models nor memberships can sustain the running costs of a startup at the beginning. Income from such revenue models only becomes interesting with increasing popularity and a large reach.

Angel investors

Angel investors or business angels are interesting for smaller startups. These are people who invest in aspiring companies. Mostly, these are people who believe in innovation and invest out of conviction instead of return on investment. Angels invest between 10,000 and 1,000,000 Euros. For startups that really want to grow, investments of 50,000 Euros or more are interesting. With this sum you can work and build up the business for real.

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Angel Investors are hardly ever just encountered on the street. A network is much more crucial. "Nothing works without a network," says 28-year-old founder Dennis Gecaj. "I have some people who support me today that I still know from previous projects. I never stopped experimenting with ideas and just kept my network up and running. So more and more people heard about me and my network grew." Dennis' example shows why the exchange with other founders is so important. They are not only sparring partners for product ideas, but already know investors and might be able to establish contacts. Such introductions are usually the door opener to good angel investors, because the relationship starts on a basis of trust. Many angels are also former founders, so it can make sense to contact successful founders on social networks.

Angel Types

If you look at the types of business angels, you will often find:

  • Angels with a large network
  • Angels who know how to build a product
  • Angels who know how to build a company
  • Smart people from your own profession who have a sense for innovation
  • Experts from a specific field (domain experts)
  • Angels with a good reputation
  • Angels with financial resources

Dividing Angels by these attributes helps when evaluating the person and when negotiating. Founders should always ask themselves what they need and then decide whether the angel can help at all.

Negotiate strategically

In negotiations, categorizing angel investor helps to be strategic. For example, an Angel Investor might argue they are investing a lot of money. A strategic question back might hint that the startup has expertise in building products or having a strong network. While money is essential, it is not everything for a successful startup.

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Founders often feel like supplicants when they meet investors. But that is not necessarily the case. With their own product, startups bring a lot to the table, such as prestige for potential investors. That is why you can enter the conversation with a healthy self-confidence and also raise critical questions. An important question in the conversation might be: Has the angel already invested in startups before and how successful were these startups? It is also not unusual to ask who these startups were and to request their contact details. If negotiating sums, then a three-step model has proven successful. Instead of asking for X amount, it is better for founders to present three models based on the growth of the company. In concrete terms, this means that for investment A, growth Y is predicted. For a higher investment (amount B) a higher growth and a third scenario, which predicts the highest amount. In this way, the conversation is more open and appears more professional than putting a fixed sum on the table.

Venture capital firms

Traditional venture capitalist (VC) firms invest 300,000 to 500,000 Euros in a young company in the hope that it will achieve unicorn status. In addition, there are also so-called Micro VC. These invest sums of around 50,000 Euros.

Unicorn

Startups with a market valuation of over one billion US Dollars. In Canada, these startups are also known as narwhals.

VCs are venture capitalists who focus on growth and returns. The startup has to be very lucrative for this type of investor group. It is much harder to convince decision makers within VC firms than business angels. Founders are often not aware that they are more likely to receive a rejection from an investor than funding. Rejections are no reason to be frustrated, though. "Rather, they should be a motivator," says Dennis Gecaj. His current startup, Zebra, is a social platform that combines images and audio messages. He convinced in a pre-seed round and raised $1.1 million. "I got a lot of rejections. But an investor, whether angel or VC, rarely tells you no. He's more likely to say, come back when you have a fleshed-out idea. In the U.S., it even makes a bad impression if you don't send a follow-up e-mail. So founders should always stay on track". The reason for the strict selection in VC firms is not only the clear focus on economic growth, but also the decision-making process. While an angel investor can decide relatively autonomously, there is a multi-stage selection process in a VC firm.

Selection process of a VC

The first people you meet for an interview as a startup are so-called full-time analysts or interns. They sift through the applications and forward their selection to the so-called associates or principals. If they are convinced, then the application documents go on to the managing partners. As a rule, there are four to five interviews before a startup can win a VC as an investor. In principle, startups should take all interview partners seriously, regardless of hierarchical level, and always give one hundred percent, because each of them can be a potential advocate.

Tell a good story

In addition to facts and figures, VCs want to hear a startup's unicorn story. A context for such a story is the question: "How does a startup manage to generate 100,000,000 Euros in seven years?". VCs also want to be inspired. In addition to the goals of a startup, the vision should also be presented.

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The pitch deck

Getting everything across is a challenge. Full-time analysts receive countless pitch decks and look at each one for about five minutes. The best way to get noticed is via an introduction. That is, when founders who are already in the VC's portfolio make a recommendation. Most of the time, analysts look for red flags first, points that could weigh against success. Also, too much creativity in the pitch deck can be distracting and can have a negative impact. It is smarter to invest in contacts and a good intro instead of investing time on an elaborate presentation. In the end, a presentation is always needed: the average slide length for VC is 20 slides.

FOMO und FOLS

Talking to investors is a good way to use their motivation for your own benefit. For example, VCs are afraid of missing out on a top deal (Fear of missing out/ FOMO). Triggers to win potential investors are references to business models that are going through the roof or the indication that you are already talking to others.

Additionally, a VC wants to avoid investing in a startup that everyone in the scene has already dismissed (Fear of looking stupid/ FOLS). Accordingly, founders should increase the FOMO and reduce the FOLS in the conversation. This can be achieved, for example, by referring to your own relevant network.

Media Startup Fellowship

You have founded a media startup and are looking for a funding program that supports you? Then apply for the Media Startup Fellowship and learn even more skills that will help your startup.

Grants

Startups should also inquire about grant programs. For media startups, for example, there are several so-called accelerators that support young media companies. In addition to Media Lab Bayern, there is also Journalismus Lab, next.Media Hamburg or Medieninnovationszentrum Babelsberg, among others. If you take a look at their programs, you will quickly see that the support is not limited to financial matters. Particularly during the creation of a startup, founders also benefit from the exchange of knowledge, for example in the fields of sales, marketing or product development. And of course from a network. Dennis Gecaj, for example, took advantage of the Open Space at Media Lab Bayern: "There you met people who were just as interested in new things as you were. At that time, for example, the guys from Userlane were also in the Open Space, and just recently I met up with one of the founders for dinner here in Berlin again."

Which funding options a startup chooses depends on the stage the young company finds itself in. Fellowship programs are usually very useful at the beginning, as basic knowledge is taught there and usually none or little shares of the company have to be transferred. VCs are relevant for startups that have a strong focus on growth.

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