Startups do not have unlimited resources at their fingertips. Getting a product ready for mass market is the primary aim and everything else becomes less of a priority in comparison.
With this in mind, searching for funding can be a very difficult task. Not only do you need to dedicate time to all those meetings but you should also have a strategy in place for securing any necessary growth capital.
PerformanceIN spoke to Adrian Renner, managing director of global savings portal CupoNation. The international publisher is co-funded by Rocket Internet, a startup incubator.
As CupoNation’s co founder and being responsible for the finance and online marketing departments, Renner has a wealth of experience when it comes to scouring the world for investors.
What is your opinion on the various financing options available to startups?
Adrian Renner: There are a lot opportunities on how to fund your company, but I will focus just on those which are relevant at an early stage. Two options that worked for us were A) Funding through own means (incl. friends and family) and B) Funding from venture capital investors.
Evaluating those options shows that A) is generally easier to secure, but the amount can be limited while B) will give you access to a considerable amount of money but the chance of getting VC funding at least in Europe is between 1-10% depending to which investor you pitch.
In addition you need to be aware of the fact that while money you borrow from friends and family has the character of debt, so the company is still 100% your own.
VC investments are different. They have the character of equity meaning that you have considerably less than a 100% stake in your “own” company. Depending on the amount invested by investors and the valuation of the company at that point the share can go down to single digits.
Consequently, although you are running the company you need to align all major decisions with your investors. Therefore, if you do not see that there is a good fit from a personal and a professional perspective between you and the VC, do not go for this option.
How should startups seek funding? Is there an ideal strategy?
AR: It all depends on the stage of your startup. If your company is already at point where it is breaking even, I would suggest bank loans or state-run startup aid programs due to less dependence and politics. Still, in most situations startups have to break even, therefore most banks will not support them with a loan.
If there is one scheme that is often easier, it is three things. Firstly, going for proven business models and second –prototyping. Finally, go for complementary team. I know going for proven business models sounds like you are essentially plagiarising, but this does not mean purely copying the original idea and selling the product in the same market.
In many cases you can apply similar principles in another market like Vapiano brought fast-food processes into Italian cuisine. Or applying the same business model in other markets. There are many cases where the dominant player is just too focused in the success within its home market and neglects the opportunities which lie in global expansion.
Secondly, developing a prototype and trying to sell it in the market is great for seeing how it performs and how well it is received. Plus it adds significant weight when you are negotiating with venture capital funds because you have market proof.
Thirdly, get a team that consists of not just people who like each other, but people with diverse backgrounds. Investors pay a lot of attention if the team members have a variety of skillsets.
What issues can crop up and how do you overcome them?
AR: As said previously when going for a VC investor it is absolutely vital that your goals are shared and that there is a mutual understanding of trust. In addition, I recommend to have a detailed shareholder agreement and articles of association that clearly describe the role and responsibilities of each party and how processes like budget approval should work.
Regarding financing through own means or friends and family, it is important to make sure that even if the entire investment in the new venture is lost, the financial security of yourself and your family or friends should not be at stake here.
Treat this investment as a speculative investment which you can afford to lose. Moreover, give yourself a timeline with milestones as it helps to set up things in an organised way. If you do not meet your milestones several times in a row you should stop your endeavor. I have seen so many entrepreneurs, even highly skilled ones, who got carried away by their idea and spent years and their entire savings to make their dream come true, not realising that the market and/or investors were not ready for their idea.
Is there any other advice you can offer based on personal experience?
AR: First, your goals have to be in line with those of your fellow co-founders and your investors. Your partners should also have the same level of ambition and dedication as you do – spending too much time convincing stakeholders and playing politics simply doesn’t pay off, and in the long run you are just losing time.
Second, you always have to be aware of the sacrifices you have to make when becoming an entrepreneur. Working 70h+ per week, not spending time with your loved ones, sports or any other hobby, can be a source of frustration.
Be clear about this with your family and partners. Try to get them on board, especially when business is not going as planned, they are a great source of support.
It is not easy to find balance between a project you are passionate about and the requests from your environment. Two final tips here: Try to involve them as far as you can, this will create buy-in and secondly, define time slots which are dedicated to them.