Financing & Promotion
Last updated
Last updated
Great that you have worked out your first 1-minute pitch. You can use this (and any formulations from it) whenever you talk about your startup and want to convince customers, partners or investors of your product.
In the early phase of a start-up, the question of financing often arises. Almost no startup team is profitable from day 1 and it often even has to bridge the time needed to develop the product financially before the market launch. This quickly raises the question of how to cover expenses for the startup and personal living costs. There are various models for this, including bootstrapping, investors/business angels or start-up funding/start-up grants.
Bank loans are not an option for many start-ups. Banks are risk-averse and do not invest in start-ups at an early stage without collateral. If they do, they require personal liability for the loan, which we do not advise founders to do in any way. 90% of all startups fail in the first few years and so the likelihood that you will have to pay back the money personally is unfortunately quite high.
Bootstrapping is an approach in which a team tries to get by without external money (e.g. from investors) and slowly lead the start-up to profitability. You try to avoid expenses as much as possible, avoid hiring additional people if possible and also carry out product development and marketing in a cost-effective manner. In the beginning, founders often work part-time in other jobs that pay their rent before they can afford to pay themselves from the turnover of their own startup. Many start-ups take this route, even if it often seems as if every start-up receives investment from business angels or investment companies.
One of the best-known ways for start-ups is financing via venture capital from investors (venture capitalists (VC))
90% of all start-ups fail. The 10% that do not fail are exciting for investors. Startups that are designed to raise money from venture capitalists are usually designed for high growth. Facebook is an extreme example: Peter Thiel was the first investor in Facebook and bought 10.2% of Facebook's shares for $500,000 (i.e. a company valuation of $4.9 million at the time). When Facebook went public in 2012, the company was valued at $100 billion. Peter Thiel's 10.2% stake in the company was therefore worth over $10 billion at the time.
Of course, this is an extreme example that occurs very rarely, but it shows what investors are speculating on. If 9 out of 10 of their investments fail, then the 10th must generate such a large profit that it compensates for the failed investments.
Venture capitalists who get involved in the early stages of a startup are often referred to as business angels. They are usually wealthy private individuals with a strong connection to the startup scene (e.g. founders who have sold their startup at a profit). Business angels also often support start-ups with advice and helpful contacts over and above purely financial support.
The first investments by business angels in Germany are around €50,000 - €200,000.
The contracts are usually concluded very unbureaucratically with the help of convertible notes/convertible loans and so a startup can collect "small" sums for start-up financing with the promise to the investors that this sum will then be converted into company shares that go to the business angels. There is no private liability for the founders. After this initial start-up financing, there are traditionally several investment rounds: Seed financing, Series A, Series B, Series C ,etc.
These financing rounds are larger financing rounds in which several investors (usually larger investment companies beyond the seed phase) provide the necessary money for the start-ups and acquire shares in the company. From Series A onwards, this involves amounts of several million euros.
The aim of the startup from an investor's perspective is an "exit". This can be a sale of the startup to a larger company (e.g. the sale of Instagram to Facebook) or an IPO, where investors have the opportunity to be paid out for their investment.
In general, venture capital offers young start-ups many opportunities to quickly pursue their vision and develop an internationally scalable product and bring it to market. The downside, of course, is that large shares of the company are given to people and institutions whose sole interest is to increase the investment.
Venture capital in Schleswig-Holstein: In general, Germany is not known for having a large investor scene (in contrast to the USA). The situation is slowly improving, but currently we think it is difficult to get venture capital outside of Berlin. If you are looking for venture capital, remember that it doesn't matter where your startup is based or where you raise the money. Even as a startup headquartered in Kiel, Germany, you can raise venture capital in Berlin or even in the US (Peer Richelsen from Mage has summarized his experience of founding a startup between Kiel & Silicon Valley here: https://bit.ly/36a3NCt )
If you are planning to raise money from business angels with your idea, there is often the question of how much money and how many shares they should give you. Think about how much money you need for the next 1 - 1.5 years (usually between €100,000 - €300,000) and give up between 10% and 25% of your company shares for this money. The less, the better and in no case more, otherwise you won't have any shares left to spend in further financing rounds and no investor will want to invest in you.
For the start-ups in the Starterkitchen, initial start-up financing is usually provided by a start-up grant from public funds. There are two different "start-up grants".
The Gründungsstipendium Schleswig-Holsteinsupports teams with innovative start-up projects. The team members (a maximum of 3 can be supported) receive money over a period of 9-12 months to cover their living expenses (with completed training/studies: €1,750, students: €800). At least one team member must have a degree and be working full-time on the start-up (no other professional activity on the side). The startup must not have been founded by the start of the scholarship (sole proprietorships or GbRs are usually accepted until then, but not corporations) and must be founded in Schleswig-Holstein within the first 3 months of funding. In addition to the individual funding amount, there is €5,000 for the team to finance material resources (the material resource funding must be applied for per material resource and approved by the WTSH).
The application process is very transparent: The startup team must seek initial contact via a university or Opencampus/Starterkitchen, which will then support the team during the process. A one-pager on the idea is then submitted in compliance with the WTSH deadlines and a meeting is held between the startup and the WTSH. The team then has approx. 2 months to write the finished application for the start-up grant (approx. 15 - 20 pages explaining all areas of the start-up and the team's planning). Once the application has been submitted, a pitch is made to the selection committee, after which the team is informed on the same day whether it will receive funding for the start of the following month. An extension of the scholarship to the maximum duration of 12 months at a later date is often possible during the course of the scholarship.
Further information and deadlines: http://www.seedfonds-sh.de/kurz-knapp.html
The EXIST Gründerstipendium is similar in terms and conditions to the Schleswig-Holstein start-up grant, but the funding amounts are higher (innovative idea, max. 3 people, max. 12 months, doctoral students: €3,000 / graduates: €2,500 / students: €800, €10,000 in material resources, €5,000 in coaching resources, no start-up possible before the start of the grant)
Unfortunately, the process for the EXIST start-up scholarship is less transparent than for the Schleswig-Holstein start-up scholarship and the competition is also higher, as it is a nationwide scholarship. The application for the start-up grant is not submitted by the start-up team itself, but by the university from which the start-up is founded (e.g. the university at which you or one of you studied). The application is very similar to the structure of a business plan, but does not have to be quite as detailed. If the university is satisfied with the application, it will be passed on to the EXIST selection committee and you will usually be informed within 3 months whether you have been awarded the grant or not.
More informations: https://www.exist.de/DE/Programm/Exist-Gruenderstipendium/inhalt.html
As the process for the EXIST start-up grant is less transparent and often takes longer, we usually recommend that Starterkitchen teams apply for the Schleswig-Holstein start-up grant.
Task 1: Take a look at the various financing & funding options for start-ups and think about how you want to approach start-up financing.
Startups are still in vogue and there are many companies and institutions that like to be surrounded by this young energy and organize pitch events or competitions. In Schleswig-Holstein, too, there are startup idea competitions, business plan competitions, Start a Startup programs, prototyping kits, innovation and digitalization awards, etc. from many institutions.
There are also many companies that like to present themselves with startups from the region or set up startup programs and competitions themselves.
As a startup, you are very often asked whether you would like to take part in these events and competitions and it almost seems as if being a winner of innovation awards and various business plan competitions is the normal way to become successful as a startup. Even as a founder, it feels good to get this attention and you gladly accept the opportunity to present yourself.
At the beginning of the program, we highlighted how important it is as a startup to work close to the customer and that it's all about developing a product that your customers love. It's also about doing this without too many distractions. Therefore our request: Make sure that you don't lose sight of your actual work in the multitude of presentation opportunities and look at all the startup programs, funding instruments, competitions with a healthy distance and always ask yourself before applying: "What goal do I want to achieve with my startup and how can this program/competition support me in achieving this goal?". Only apply if you believe that this competition/program will bring you closer to your goal of a profitable company and you believe that it is worth the effort.
Unfortunately, we have already seen startups that have lost their way in these startup offers. An exaggerated example: A startup received the SH start-up grant, the founders also made progress on the theoretical concept within the 9 months of funding, won an innovation prize (endowed with €2000) and a business plan competition (endowed with €3000), but did not work on the product in a meaningful way and have not yet won any customers. Because the start-up was not nearly profitable after the end of the scholarship, the GmbH was converted back into a GbR so that the EXIST start-up grant could be applied for and the next two months were spent writing the EXIST application. Things continued in a similar way with the EXIST grant and in the end this multiple award-winning startup had to file for bankruptcy because the product was not accepted by the market and the startup did not have enough paying customers to cover its expenses.
We don't want to take ourselves out of this forest of offers, and we also see great value in many programs and competitions for participating startups. We would just like to ask you to always focus on your goals and see how you can best achieve them. It is better to have a startup that almost no one knows about but has a good product with many satisfied & paying customers than an award-winning startup that everyone knows from the last pitch event but cannot survive without external funding.