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There are many different options and ways of financing a company. They must fit in with their own current situation, which is defined by the following aspects:
- Ambition, experience and skills of the founding team
- Evidence that market value is created (turnover, number of customers, reference customers)
- Long-term competitive advantages (network effects, switching costs, patents)
- Market size and trends
It's worth thinking about this here, because there's not just one way to finance your startup. We have ranked the options with advantages and disadvantages. Which is right for you?
Financing through bank loans
Historically, bank loans have been the first source of financing for start-ups.
The benefits
- You don't lose any equity
- There is no need to create a pitch deck.
- A good credit rating can help make up for weak fundraising skills
- Good for financing real estate and investments
The drawbacks
- Rarely available for start-ups
- A lot of paperwork and a lack of common sense when granting loans
- Monthly loan repayment, even if you have no income
equity-based crowdfunding
Equity and debt crowdfunding, as well as the hybrid use of convertible bonds, has become more important in recent years. Advantages and disadvantages must be considered carefully.
The benefits
- In contrast to loans, income does not have to be repaid monthly
- It allows you to attract more stakeholders who are committed to the success of the startup
- Existing platforms and investor databases make the process easier
- PR can generate enthusiasm and urgency among other potential investors
The drawbacks
- Platforms can be expensive and eat up a high percentage of investment
- Requires a strong marketing strategy and a high marketing budget
- The success so far must be understandable to a wide range of investors
- It entails high documentation and information requirements
Donation-based crowdfunding
Crowdfunding on a donation basis is less complex than crowdfunding through equity.
The benefits
- Enables you to win over customers and users
- Collecting money together with creating PR hype and free attention
- There is no need to surrender equity in the company
- Lower legal costs
The drawbacks
- Platform fees and processing costs can eat up a large part of the collected capital
- The ups and downs of the company are understandable online for everyone
- It's not as cool as 2013 anymore. We're in a new decade
- The costs for you in the form of marketing spending and management attention may exceed initial expectations
- Platform fees and processing costs can eat up a large part of the collected capital
Funding from family and friends
Raising capital from family and friends is usually the first, because it is the most obvious. When you deserve trust, it is given to you by your close circle. With investors, you have to work it out first.
The benefits
- They will be happy to share their success with you
- There are low expectations for the pitching process
- You are more willing to take part in difficult phases or slower progress
- It is a relatively easy negotiation situation
- The low burden of meetings and pitching and negotiation conditions
The drawbacks
- You are likely to be able to contribute little experience and knowledge
- Failure can cause close relationships to suffer or be destroyed
- A difficult negotiation situation results in a disproportionate dilution of the cap table combined with low capital
Financed by a business angel
After friends and families, angels are usually the closest group of investors.
The benefits
- Will finance based on your founding team and the potential of the idea
- Can act as an advisor and assist with another round of financing
- Often makes connections with other angels who invest together
- They play a more passive role than VCs
The drawbacks
- You may not be familiar with the business model and industry
- The financing process takes time
- Can the surrender of a significant EC share mean
Financing through accelerators
With their network and additional services, incubators and accelerators can set positive momentum in motion. However, they are relatively expensive as they usually invest little capital.
The benefits
- Presentation of qualified investors
- Access to a network of founders and mentors
- Create focus on the development of the company
The drawbacks
- The ratio of issued equity to financing amount is sometimes very high
- An accelerator entails obligations, such as attendance, travel and recurring participation
- There are high expectations for results over a defined period of time
Financed by a strategic investor
Strategic investors are established companies that acquire a strategic option by investing in a start-up. These are mostly product development and diversification strategies
The benefits
- Strategic investors offer access to customers for product development
- Access to industry-specific knowledge and know-how
- Possibility of working together as reference customers and thus credibility and visibility on the market
The drawback
- A strategic investor usually excludes a future investment through venture capital due to diverging interests
- Strategic development options are being limited
Financing through venture capital
Venture capital investors are the financially strong partners for ambitious entrepreneurs to implement their vision. They usually only invest in the company at a later stage when other financial options have been exhausted. They are
The benefits
- A lateral thinker with a vision for the future
- High investment sums to expand and scale aggressively
- Professional due diligence and negotiation processes
- Skilled consultants and networkers
- A renowned VC boosts the signal on the market
The drawbacks
- Few want to lead the way as a lead investor
- VCs have tough demands as they themselves have responsibility towards their own investors
- You must rigorously implement your own roadmap and goals
- The company's development path is defined and pivots are becoming more difficult
- VCs follow trends because they are guided by what other VCs think of them
Financing from paying customers
Paying customers are the ideal means of financing.
The benefits
- They are the strongest sign of success for investors
- Revenues reduce relative financing requirements
- They strengthen their negotiating position with financiers
- They enable key KPIs that make it easier to address financing
The drawbacks
- They are not easy to win, especially in the B2B and enterprise sectors
- Customer is not customer. Solutions must be repeatedly sellable
- Business models require time and resources to create added value
