The business idea stands. Maybe a company has already been founded, or your startup is already making first sales, but now wants to really get started in the growth phase. Most of the time, the limiting factor is not creativity, time, diligence or a strong founding team you can rely on, but simply capital.
Capital is the blood of every startup. And that is precisely why it is increasingly important to not only combine competencies in the team as part of the actual start-up project, but also to master the basics of fundraising. Where can you find startup investors? Where do investors, in turn, seek equity investments? And what role do the so-called stages – ie development phases – in which your startup is currently playing? In this article we would like to explain the most important sources of capital.
Startup investors in the immediate environment – Friends, Family and Fools
One of the most obvious areas where you can find investors for your business idea early on is your direct, private environment. Known and relatives know the founder personally. An assessment of the team and the associated competences is thus possible from a special point of view that other potential investors do not have. Also, the founders have a vote of confidence, if it is clear that the team has “committed to the cause”.
But accepting money from the personal environment also has its pitfalls. “With money, the friendship ends,” is a well-known saying. The money itself is not the problem, but the frequent lack of transparency about the actual risk of founding. The majority of start-ups fail, the capital is quickly used up and sales are initially left out.
Even if the project was promising, the liquidity is going out in the meantime. Then the initial euphoria of the private investors quickly turns into disappointment, which often affects the personal relationship. Because: The clean separation between personal and business issues does not succeed everyone.
Business Angel / Angel investors: wealthy individuals with mission
Angel investors, sometimes referred to as business angels, are mostly wealthy individuals who want to invest capital in new startups to create something new together as a team. Angel investors are therefore often intrinsically motivated and open to actively advising the team.
So angel investors can be very valuable for startups because they not only raise the necessary capital, but also bring in important know-how that is otherwise difficult to access.
Angel investors usually invest within a range of € 50,000 to € 200,000 for startups that are stuck in very early stages, ie in the pre-seed or seed stage. The participation then usually takes place as a share in the company, as a convertible or as a loan.
It is important to understand that angel investors ultimately invest their own money and therefore tick something different than, for example, venture capital funds. Say: Angel investors can sometimes have very different strategic or individual focus.
Angel Investors who only invest occasionally usually take much longer to reach a decision and are rather non-binding. On the other hand, active and professional business angels make about six deals a year on average and therefore know the corporate law processes. You can expect them to opt for or against investment in the first three meetings – but always give you valuable feedback.
Inquire before any meeting in which areas they have invested so far. Ideally, you can then score points with your research and build on past career stages or investments of the angel.
Because private investors rarely make an official appearance because, unlike venture capital funds, they are not required to actively invest in startups, it is often a challenge to find business angels.
Ask here in your personal network or use professional databases that do the research and can actively find startup investors for you. A targeted approach and research of the past activities of the angel investor, but also a certain variety of available investors increases the probability of a meeting enormously. So be focused but systematic – a list will help you keep track of how to get in touch.
Professional Investors with Big Investment Tickets: Venture Capital Funds
Venture capital (VC) or venture capital is a subset of private equity, ie a special type of investment in which the equity participation of the investor is not tradable on regulated markets (stock exchanges).
The difference in terms of venture capital is therefore not sharply defined, but specifically refers to the private equity share, which consists of young companies that are not yet generating sales or profits or are already positive for sales or profits, but still need additional capital for need the scaling and growth phase.
As with angel investors, the strategic characteristics, the capital provided, the industries or the preferred stage of a venture capital firm can be very different. However, all VC companies have in common that they in turn manage the capital of their investors. This mandate changes the interests compared to an angel investor. VC companies need to find and invest in exciting startups on a regular basis to get their money working. The aim of a VC company is then to sell the shares of the respective startup a few years later with a profit or even work towards an IPO.
In which startups the capital is invested differs from VC to VC. Micro Venture Capital funds usually manage a fortune per fund between 10 and 25 million € and place capital rounds sometimes from just € 100,000, but usually higher. Micro venture capital firms typically require startup participation rather than (loans or convertibles) and often after a few months provide follow-on investment in a next round of financing provided that the startup is performing well and traction is evident is.
However, the investment horizon is often shorter than that of traditional VC companies. Shareholdings over 20% are rather rare, shares of 8% to 10% of the company more often. Due to the lower investment compared to traditional VCs, micro venture capital funds often already invest “earlier” in startups, ie in phases in which possibly no or very low sales are achieved, but the basic product stands.
Classic VC funds usually manage larger sums of € 50 to € 300 million. For early seed financing, provided that a particular VC company specializes in seed days, corresponding funds usually invest between € 500,000 and € 2 million.
Smaller sums of money are rather atypical, simply because a large fund must ultimately be able to accommodate its capital. If funds then already invest smaller sums, the startup portfolio of the VC would quickly get confused big. Classic VCs also typically require participation in the startup range of 15% and 20% in the “late” seed phase or Series A phase. An investment is usually only in question when it comes to promote the startup through the capital sum in the next growth phase and capital round.
Venture capital companies are professional investors. They therefore know the process inside out and usually have a very precise strategic focus. It is therefore essential that a start-up team recognizes the exact investment focus before contacting them and only addresses those VCs who basically invest in start-ups with corresponding criteria. These can be diverse, but in any case, the founders should recognize the preferred vertical, industry, and business model of the VC, as well as answer the question in which stage, ie phase, the VC usually invests.
An intensive research is time-consuming, but usually pays off at the latest when contacting. As with Angel investors, specialized service providers can also assist in researching suitable investors. In the end, it is like a personal job interview: Certain previous knowledge of the respective venture capital company creates a positive impression and increases the chances of entering into a personal conversation. By the way, VCs are often very fast and will usually decide for or against financing after two to three meetings.
Investors find with professional partners
After the fundraising is before the fundraising. Anyone working in a startup quickly realizes that work is almost never going to happen. The capital search is then an additional, active effort for which there are hardly any capacities left.
But especially in the search for capital a half-hearted approach is rarely crowned with success. It is important to approach the investor approach as efficiently as possible and to address only “the right” investors and, if possible, concentrate on the personal touch, ie a personal approach.
In order to support this, providers such as Capmatcher have established themselves, who actively support and advise on the search for potential, suitable investors. So while the start-up team can continue to care about the startup’s success, trained startup scouts and finance specialists review the investor landscape in parallel and select suitable candidates, without the founders needing to scrutinize.
For this purpose, Capmatcher.com offers interested start-ups a specially developed form that queries the most relevant investment criteria. Any further data entry becomes superfluous. Both the use of the form, as well as the manual creation of an individual exposé, as well as a listing in the Capmatcher database, to which accredited investors have access, is free of charge.