Sooner or later, every founder reaches the point where they need money for their startup idea. Depending on the growth stage, there are several options to get funds. Our article will show you the 3 best options to get funding for your startup.
1st Funding Opportunity – Bootstrapping
When bootstrapping startup founders completely dispense with external financing and get funds either out of their own pockets or borrow the money from friends or family. This methods aims to avoid larger spendings during launch and to maximize revenue at the same time. The term “bootstrap” derives from the literal bootstrap and sometimes is attributed to the “Adventures of Baron Munchhausen” parable that sees the protagonist pulling himself out of the swamp by his own hair. Especially at the beginning, bootstrapping is the favored method of many founders. However, you should be aware that you will have to work on a strictly limited budget and timeframe. You should aim to keep spending to a minimum during launch and develop your product as quickly as possible. That way, you’ll quickly transition into the operations phase and reach the break-even point for your startup fairly quickly. If you manage to accomplish this, you’ll generate a positive cashflow. A major advantage of this method is that you remain in complete control of your startup since you don’t need to cooperate with external investors. Your company is entirely your own.2nd Funding Opportunity – Business Angels
Another funding option is “reeling in” a business angel. A business angel is an experienced entrepreneur who supports founders in building their companies, not only with financial means but also with their knowhow, and access to their professional network. According to a study by the ZEW (Leibniz Centre for European Economic Research) from 2020, in more than 60% of cases business angels already invest into startups in their launch year
You definitely profit from the business angel’s knowhow at the beginning of your journey, they are after all founders with long years of experience. They know what’s really important and can give you and your team the best possible advice. In a way, they also act as “guardian angels”for your company – which is where the name comes from.
On average, a business angel makes a first-time investment of around 25.000 and 100.000 Euros over a period of 4 to 7 years. The financial support is also a crucial factor in the cooperation between busines angel and startup.
According to the ZEW study, most startups say that they’ve been actively mentored by their business angel. The bonus of having access to the business angel’s network was additionally helpful to many of the funded companies. More than 80% of tech companies funded by business angels state that they got into contact with suppliers, customers, and consultants through their angel’s networks.
A business angel doesn’t, however, invest time, experience, and money into a venture they have nothing to gain from. They aren’t selfless angels, even if the term has that implication. In exchange for their support, they receive company shares from your startup.
So, by actively supporting your startup in its success, they profit themselves by making the figurative pie larger. That way, they receive a share in the winnings and secure their ROI (return-of-invest).
3rd Funding Option – Venture Capital
Business angels can’t be equated with venture capital investments. This type of financing only becomes relevant at a later stage of the founder journey. Venture capital refers to a section of the private equity business where private equity firms invest into not-publicly traded companies and profit from their winnings. Venture capital in this context is a time-limited equity capital investment into an aspiring, innovative, and usually tech-oriented company which is quickly growing and not publicly traded – the very definition of a startup. Venture capital firms consequently are companies that invest into startups by means of venture capital funds. Generally, venture capital funds focus on a specific industry sector. By investing capital into a company, the venture capital firm becomes a shareholder with all rights and duties that position entails. The goal is, however, not to get the majority shares; these are supposed to stay firmly with the founders. For the most part, the venture capital firm’s investments are limited to one of the developmental stages of a startup. The goal – to accelerate the value increase of the company so that the best possible investment yield can be ensured by the end of the investment period. In addition, some strategically inclined investors support young companies with consulting services such as sector-specific expertise and management knowhow to help the company grow in the best way possible. At the moment, the “Bundesverband Deutscher Kapitalbeteiligungsgesellschaften” (German Private Equity and Venture Capital Association) comprises around 300 members. 200 are holding companies, most of these are in turn venture capital firms. It can often be challenging for founders to find the venture capital firm that’s the best match for their startup.
External financing is becoming relevant for your startup?
Then apply for our Accelerator program and we will help you with financing and market entry – every step of the way.
