Financing your start-up
Start-ups tend to have limited resources. They therefore depend on finding external financing to develop their business. Here are the best ways to finance your start-up.
You can raise money through the following four sources:
A common way to finance your venture is with equity. In this case, an investor (a shareholder or proprietor) provides your start-up with assets, receiving a share of your company in return. The investor hereby becomes a co-proprietor in your start-up and gains certain rights to information and codetermination. However, he is not entitled to any company secrets.
Equity investments provide an investor with two kinds of advantages. He not only benefits from the distribution of dividends, but also from a rise in equity value. Whereas dividends lead to a direct cash flow, an increase in equity leads to a higher value of the share in the company. If the investor decides to sell his shares he will then make a profit.
The amount of an investment determines the liability of the investor as a “liability ceiling”. In case of bankruptcy, the investors can only access their investments after all other creditors have been disbursed. This can lead to a total loss of an investor’s equity.
For start-ups, the most common source for investments are the 3 F’s: Friends, Family and Fools. In most cases, friends and family are the first investors of young start-ups. They have the advantage of knowing the capability of the young entrepreneur and assessing the risks of their investment.
Another way to finance your start-up is with liabilities. These are mostly provided by banks, but also by private individuals. These outside creditors have a claim against your company amounting to the sum of their loan, but do not have the same rights as an equity investor. However, a loan agreement can include certain securities that provide the creditor with leverage in case of payment difficulties. The agreement can also include duties to provide information to the creditor.
The outside creditor is entitled to an interest on his loan. Furthermore, the redemption can occur over the term of the loan or at the end.
Start-ups tend to have trouble getting loans from banks. This is mainly because the future development of the start-up is unsure and banks assume illiquidity, but also because barely any assets can be posted as collateral.
Business Angels und Venture Capitalists
Business Angels and Venture Capitalists help start-ups in their early stages to raise equity. As mentioned before, their equity comes in exchange for a share in the company. But in most cases it is more than financial assistance that they offer, as Business Angels and Venture Capitalists offer valuable know-how and consultation.
In most cases, Business Angels are successful entrepreneurs that have sold their company and are looking to invest in new start-ups. They therefore tend to take an active role in the development and assistance of the start-ups they invest in.
Venture Capitalists are very similar to Business Angels. The main difference is that VCs are firms or fund companies, rather that individuals. They offer intensive coaching in the following phases after their investment. Venture Capitalists look for their investments in a certain pattern, focusing mainly on tech and web-based start-ups.
Prize money at start-up competitions
Another way of raising capital is by attending start-up competitions. In most competitions you can win seed capital without having to give away a share of your company. This prize money can amount to a very large sum at big competitions. Your start-up is mostly assessed by a panel of experts and compared with the competitors. Hereby your success depends on a thorough presentation and a good business idea.
This website has a good overview of all the start-up competitions that are coming up: www.jungunternehmerpreise.ch