Before and after founding a start-up, founders regularly ask whether it makes sense to seek external financing. And if so, what should that financing look like? Answers to the 10 most important questions on this subject are found below.
1. As an entrepreneur, what can I expect life to be like? It will change you – after a few years, your personal surroundings will seem to you to be narrow-minded and inflexible. But why is that? In the same period, during which your best friend has pursued a career in a corporation, you have had to solve 100 times as many problems, and have often faced existential challenges whose decisions have exacted an emotional toll that you could not have foreseen. In other words, you have an extremely steep learning curve. More than anything, it’s great fun, despite the 14-hour days on average during the first few years!
2. Where can I be with my start-up in 5 years? You can achieve revenues of between EUR 5 and 20 million, depending on the business you are in. At that point, a buyer will probably acquire you. Set high goals for yourself – but be realistic too, because the often-cited "billion dollar company" is a purely accidental phenomenon and cannot be planned.
3. How can I figure out how high my capital requirement is? You should plan as if you would be able to reach break-even at 2 million in sales within 2-3 years with one round of financing. The biggest uncertainty (with an existing Proof of Concept and a functioning R&D department) is the market launch!
4. Which investors should I consider? Make yourself a list – at the very top should be private, independent VCs that have specialized in start-ups, then business angels, followed by government development agencies and banks, assuming you can provide collateral. True entrepreneurs will accept even the second-best funds if they cannot get their first choice.
5. How do I choose the right VC for me? Above all, the "right" VC is private and independent – that will ensure that you have their undivided attention to follow the same goal and feel the same pressure that you do: to become successful and rich. But VCs are focused, too: that is, almost all of them will say they do everything, but if you look at the portfolio you will see certain concentrations. And at second glance you will be able to see where a specific VC has been particularly successful. For example, although some excellent Internet IPOs were conducted, something like technology investments weren’t successful.
6. What valuation should I accept? As disenchanting as it might sound, in the beginning it’s not an upside maximization as much as a downside minimization. Without financing you probably cannot meet the goals listed under number 2 whatsoever. That’s not only because of the investment volume but also more specifically because of the know-how of the VC as co-entrepreneur. The VC is under pressure to achieve a realistic outlook of a factor of 10 on his investment. In the case of a mid-sized corporate value of EUR 40 million paid through an M&A, for financing the VC doesn’t have the leeway to valuate your company at more than EUR 2-3 million. If a VC offers you more than that in the first round, it should be a signal to you either that the VC does not understand the business or merely needs to place some money. In either case, the VC will not have any drive to succeed with you.
Furthermore, don’t think that the answer necessarily lies in "staging", that is, creeping from one valuation round to the next higher round in small financing steps. That is a naive dream stemming from the Internet bubble that won’t get you anything except a constant preoccupation with financing rounds. Ultimately you will come to the conclusion that you haven’t been able to concentrate on your real job and therefore have not reached your goals and are standing with your back to the wall.
7. What is it like to collaborate with a VC? If you think that you’ll be left alone to "do your thing" then you should start farther down on your investor list. "Non-VCs" are more likely to leave you in peace and quiet (that is, however, only until something has gone wrong, and then things often get rather "cramped"). VCs, by contrast, will work closely with you (a weekly conference call is the rule) and will help you a) not to fall into every trap and b) to recognize every business opportunity early enough and get the maximum benefit from it.
8. Will the "Exit" for me be something like an "Exodus"? If, in the case of an M&A, you stay with the company another 1-2 years as is often called for, it won’t be in any event. Otherwise, true entrepreneurs are happy to have new challenges in which to apply and expand their newly acquired knowledge and experience.
9. What kind of impact will the present economic crisis have on me? Only a positive one – cemented economic structures are forced open by the modification or disappearance of the Opels and Arcandors of the world. Established companies are under enormous pressure to adapt, variablize expenditures and minimize costs. This will help you directly, because by definition you are more flexible and more agile, which is the prerequisite for the survival of your start-up. You are also in a much better position for recruiting qualified employees: Today, the promise of a great career and security in a traditional company are less of a given than they have ever been – that fact opens up many people’s eyes as to better opportunities in a start-up.
10. There are so many advisors out there that are all trying to tell me something different. How can I believe anything they say? Make sure you scrutinize the advisor’s motivation and skills. Both are relatively easy to assess. In the case of the administrative officer, advice about your new enterprise is certainly well intended, but just as certainly does not come out of a wealth of personal experience. VCs and entrepreneurs are on the other end of the spectrum – they speak directly from their own experience. The VCs that you talk to about financing, especially, have the same interest as you: success. But look around! There are many pathways to wealth: there is no silver bullet here!
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