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Great Idea - And Then What? How To Fund A Startup

25 January 2022

Great Idea - And Then What? 

How To Fund A Startup

Contribution by Volker Doberanzke, PhD, Numarics Chairman of the Board of Directors and Professor of Finance and International Management

You have a great idea - innovative, groundbreaking and highly relevant. You've told friends about it and they're excited too, some even want to join in. And at some point the question arises: How do we finance the implementation of the idea? Where will the money come from? Who can we ask and who will support us?

Numarics gives answers.

 

From idea to start-up

Most of the time it starts with a simple idea: There is a problem that is supposed to be solved or even better: has to be solved. Or you realize that something big could come out of a small activity, or you know the market and you know there are things that just don't work well. However the idea comes about, the key is to be passionate about it. Without passion, great visions don't happen. Usually friends or family members are involved at this early stage - for discussion or as sparring partners. Passionate conversations begin, ideas are developed or discarded, in short, the challenging and often grinding process of developing a viable business idea begins. And at some point, the time is ripe and the decision is made: This is the idea for my startup!

The start-up experience shows: The idea - along with a number of other factors - is absolutely crucial for later success. It doesn't have to be complicated. Many simple ideas have led to companies worth billions. One example is the start-up Revolut. There were already dozens of banks offering accounts and, moreover, the very best banking service, all over the world and at all times. Nevertheless, the idea to create a new banking app had enormous success. Revolut was founded in 2015 and valued at over 4 billion euros four years later. An extraordinary idea? No. But the attempt to set a counterpoint against the banking establishment - the idea of establishing a "fair" bank led to success.

Once you have a business idea, the question is: How do I finance the implementation of my idea? In the following, we present 5 strategies on how you can get funds to implement your startup idea.

Your Own Money

The easiest way is if you have money available yourself. This is not only the most straightforward, but also the cheapest and, even more crucially, the fastest option. More than 90% of all startups are financed with money from the founders or founding teams. The key advantage of this financing option is obvious: you remain independent and can implement your idea without outside influence. This has enormous upsides, especially in the start-up phase. Moreover, you have a 100% share in the value of the company and its profits. In this context, the term "bootstrapping" is often used. This term is based on the Münchhausen fairy tale, according to which Baron Münchhausen pulled himself out of the swamp by his own bootstraps. Transferred to your startup, this means that with the help of bootstrapping you try to start your startup on your own without external help.

However, there are some important points to consider with this form of financing: Since financial resources are usually very limited in the context of self-financing, cost control is absolutely crucial. In this phase, the founder(s) will usually also have to significantly downsize their lifestyle in order to be able to use all available financial resources for the implementation of the startup idea. At the same time, there is enormous time pressure to go to market as quickly as possible so that the revenue process can bring additional cash into the company. And the need arises to reach the break-even point as quickly as possible. Effectiveness and efficiency in action and implementation are therefore extremely important in bootstrapping.   

The 3F Method: Friends, Family and Fools

If there is not enough of your own money, the 3F method could come into play: Here, 3F stands for friends, family members and "fools." The advantage is obvious. They know each other and the people involved. In most cases, this group of people is so familiar that it allows both sides to assess whether an investment makes sense or not. Moreover, with this method it is usually the case that you retain full control over your company. Or even better: You get additional know-how in the form of advice from people who invest in your company. The term "Fool" describes wealthy private persons from the near or far network, who are enthusiastic about your idea.

This form of financing is even more reasonable if people from the 3F environment are familiar with your business idea and ideally even know the relevant market. Then, in addition to the financial means, you will also receive one or more sparring partners who will support you in word and deed as you build up your company.

Business Angels

Another possibility for obtaining financing is the involvement of so-called business angels. The business angel (BA) is an investor who takes an equity stake in your company; at the same time, the business angel acts as a sparring partner in all matters relating to the formation and development of your company. Regularly the Business Angel will also use his/her network to advance the implementation of the business idea. Most of the time, he himself has extensive experience in founding companies and has often been able to build up more or less wealth through a successful exit.

Once you have identified a business angel, however, there are a few things to keep in mind. The BA will only provide you with additional equity if he /she receives a share in return. This means that you may be restricted in your decisions, as the BA usually has a strong interest in how you use the money provided and how your company develops. There are a number of business angel networks in Switzerland and Europe. Before you contact a potential BA, you should have put your idea on paper and ideally have developed a business plan (see also the article: "No Success Without A Plan: The Business Plan").

Crowdfunding

Crowdfunding (CF) is still a relatively new way of financing your startup. With the help of CF, startups can obtain financing from private individuals - usually via an Internet platform. These platforms bring startups and potential investors together. Depending on the design of the CF, the potential investors and financiers then participate directly in your startup or in the future profits. In Switzerland, there are over 40 CF platforms vying for startup ideas in Switzerland. Some time ago, the Lucerne University of Applied Sciences and Arts analyzed how the volume of CF in Switzerland has developed. The numbers speak for themselves: in 2019, a volume of more than CHF 400 million was made available via the various CF platforms by more than 180,000 private individuals. However, less than 10% of this amount - approximately CHF 33 million - is attributable to the area of startup financing in the narrower sense. However, it can be assumed that crowdfunding will continue to gain in importance as a form of financing for startups. CF platforms active in Switzerland are, for example, www.lokalhelden.ch and www.wemakeit.ch.

Venture Capital

The financing of your startup via so-called venture capital companies (venture capital) is one of the classical financing methods. Throughout Europe and also in Switzerland, there are numerous venture capital companies that specialize in providing early-stage risk capital to startups. The decisive motivation of such investments is to sell the shares received in return for the provision of equity at a profit via a later "exit". Although the financial resources are generally made available for an unlimited period of time, the aim of the equity investment is not to pay dividends (distribution of profit), but to make a profit from the sale of the investment. As a rule, venture capital companies - in addition to pure financing - also provide additional services, such as advice on business management issues or support in matters of operational and strategic management.

There are a number of things to bear in mind when financing through venture capitalists. It is consistently the case that the formal requirements for these companies are in part significantly higher than for financing via the 3F method. For example, the business idea must be presented clearly, the expected sales volumes must be analyzed and, in general, a formal business plan must be available. The hurdles are therefore usually quite high. In addition, most venture capital companies expect a say in the company in return for an investment. Among other things, this results from the fact that many startups do not survive the first two to three years. The co-determination is then a possibility for the VC company to influence the management; the investor thus often receives information, control and co-determination rights that go beyond the usual participation.

 

Numarics provides you with a business operating system designed to lead your startup to success. Our experts and technologies make starting and running a business easier than ever. This gives you a significant advantage right from the start: time to focus on your core business. Numarics as a solution for entrepreneurs is novel worldwide and fits seamlessly into your lifestyle using your smartphone, anywhere and in real time. Dive into the next evolutionary stage of entrepreneurship - you do your business, Numarics does the rest. 

Volker Doberanzke, PHD
Numarics Chairman of the Board of Directors and Professor of Finance and International Management
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