Today we’re talking about the exciting topic of “Startup Financing” Every startup that wants to succeed with innovative ideas will sooner or later face the challenge of finding the right financing. Without sufficient funds, it’s hard to turn these ideas into reality. Personnel costs, materials, external services, and marketing typically cost a lot of money in the early stages.
Table of Contents
- Challenges in Startup Financing
- Equity Capital
- Bank Financing
- Business Angels and Pooling
- Venture Capital
- Crowdfunding and Crowdinvesting
- Self-financing
- Conclusion on Startup Financing
Challenges in Startup Financing
Many startups have a clear idea of how much capital they need and how they want to obtain it. The foundation for successful financing is a solid company valuation and a financial plan that realistically reflects the potential of the business to investors. However, it’s not always easy to convince potential investors. Demand for startup financing is high, and founders often need to invest a lot of time if they want to avoid accepting poor conditions that could hinder growth later on.
Typical Financing Options
Equity Capital
Many startups begin with what they have: their own savings. This is often the first step before looking for external investors. But these savings are often quickly depleted, especially when investing in product development, marketing, and scaling. Capital requirements can quickly reach the high five- to mid-six-figure range, while revenue is still limited. Friends and family are usually happy to support ideas, but even that has its limits at higher amounts.
(Investment) Bank Financing:
These are traditional loans that are repaid over a fixed term. Typical investment volumes range from €25,000 to millions of euros, for example, as a lead investor. Fortunately, banks offer a variety of loan types tailored to the needs of startups. Below are the most popular bank loan types for startups. These types of loans also apply to many other capital providers:
Startup Loans
This is a special loan for newly founded companies. It often has favorable terms and can be used to finance the first steps of the business, such as purchasing equipment or renting office space.
Investment Loans
This type of loan is for major purchases such as machines or property. It typically has a longer term and offers fixed monthly payments, which helps with financial planning.
Mezzanine Financing
This is a hybrid form of equity and debt. The company receives the loan without collateral but must grant the lender equity participation rights or options in return.
Factoring
With factoring, a company sells its receivables to a bank and receives immediate liquidity in return. This is especially useful for startups that are waiting on payments but need liquidity in the meantime.
Convertible Loan
A convertible loan is a special form of loan often used in startup financing. It is a short- to medium-term debt instrument that can later be converted into equity. Key points:
Definition: A convertible loan is a loan that can be converted into equity (i.e., company shares) under certain conditions at a later date.
Startup advantage: It allows startups to raise capital without immediately giving up shares. This is particularly useful in early stages when determining fair valuation is difficult.
Investor advantage: Investors can acquire shares later at a favorable price, especially if the startup becomes successful. Often, a discount on the future share price is granted upon conversion.
Interest: Like other loans, a convertible loan may bear interest. This can be paid in cash or added to the loan amount and converted into equity later.
Conversion timing: The conversion may occur at a predefined time or upon certain events, such as a next financing round.
Valuation cap: Often, a valuation cap is set to define the maximum valuation at which the loan will convert into equity. This protects the investor from excessive dilution in future high-valuation rounds.
Risk: As with any investment, there’s a risk that the startup fails and the investor loses money. However, a convertible loan is typically repaid before common shareholders in case of liquidation. It also signals a future commitment to investors, which may include early (low) caps that can hinder new investors.
In summary, the convertible loan is a flexible financing instrument beneficial to both startups and investors. It allows early-stage funding without immediate valuation and gives investors the chance to benefit from future success.
Startup Financing with Business Angels
These are private individuals who invest in startups. They not only provide capital but often also valuable knowledge (smart money) and connections. Investment volumes range from €25,000 to €1 million. Through investment pooling, several business angels can be combined, enabling voting rights to be managed and the cap table to remain clean.
Crowdfunding & Crowdinvesting
Startups present themselves on platforms (Companisto, Seedrs, …) and many people can invest small amounts. Funding volumes range from €100 to several million, depending on whether it’s crowdfunding or crowdinvesting. In the DACH region, amounts of €500,000 to €2 million are typically raised.
Government Grants as a Startup Financing Instrument
Especially for new ventures, public funding should not be underestimated. Government institutions as well as various associations and startup organizations offer grants to support new businesses. The bureaucratic effort can be higher, but it usually pays off.
Incubators & Accelerators / Startup Programs
It’s not always just about capital. A good network or the right tip at the right time can save a lot of costs and accelerate the development of your startup. Startup organizations and business angels offer valuable advice that can help your business grow.
