Are you a first-time founder looking to grow your business, but unsure which fundraising option to follow?
My name is Philipp Merk, I’m an experienced entrepreneur with seven years of experience in the start-up ecosystem, and I can help you determine the best path to take for your business.
First, a little bit about me. I have a technical background in engineering and data science, and I dropped out of MIT before I started my master’s degree in order to start my own venture. That’s how passionate I am about entrepreneurship, and I’ve never regretted my decision!
I’ve been involved in a range of different projects, mostly involving cool new technology and innovation. I started in satellite development, developing a satellite to monitor countries’ greenhouse gas emissions at Airbus. I quickly got bored of corporate structures and started work at a German unicorn called Lilium.
Later on, myself and three co-founders started Loewi, a health start-up that aims to produce personalised vitamins according to individuals’ blood tests. We have now sold the company after scaling it for three years, but I am involved in the transition, as well as being an advisor to different start-up projects.
During my time as an entrepreneur so far, I’ve learnt a great deal about fundraising, and made many mistakes along the way. I hope my insights can enlighten you and help you make the best possible choices for your business!
What Are the Different Fundraising Options Available?
The first hurdle you might face is choosing the best fundraising path for you and your business. There are plenty of options available out there, but not all of them will work for every business.
Bootstrapping. This essentially means you self-finance the company, turn it into a unicorn, then eventually sell it. This option is best if you either don’t have many expenses, or if you already have capital available through your own funds or friends and family, for example.
Government grants and funding. Governments often have schemes to support start-ups and innovation, usually with the end goal of creating employment in the country. These are ideal for first-time founders still studying or unsure whether to pursue a venture full time, as it’s a zero-risk option.
Business Angels. These are wealthy individuals who have often previously founded a company, have experience in a certain space, and want to support other founders with money and their expertise. This option is great for a round smaller than VC, and if you need advice or a mentor in a particular industry.
Venture Capital (VC). Venture Capitalists have “the big bucks”, and only consider large ticket sizes (generally no less than a few hundred thousand). This is the best option if you have a business that’s already generating a fair bit of revenue and has many inbound leads, and you need to scale it at speed.
Bootstrapping is a good solution if you have a business idea that’s not research or product development based. For example, that could be a simple product like a drink that you’ve created: you’ll only need funding to make the first batch, and from there you can generate cashflow quickly.
Another type of business that can be bootstrapped is agencies or consultancies, who sell their time, not a product. You don’t need to scale these companies as fast and you should be able to cover your costs with a limited amount of funds.
A quick caveat about bootstrapping, though. If you’ve been running and funding your business in that way for a couple of years and it’s not quite working out, the temptation might be to look elsewhere and find other types of funding. However, it’s important to be realistic at that point – is there just a problem with your business? In many cases it’s more beneficial to cut your losses before you spend weeks on outreach and pitching.
Government funding and grants
This option is well suited to founders who are still studying, and unsure whether they want to commit 100% to an idea. Most grants and government funding are risk-free, meaning you don’t have to give any equity away, and you don’t have to pay them back. As such, it’s a great way to experiment and see if your business works, without risking anything.
In Germany, there’s a system called [EXIST?]. This programme is specifically aimed at first-time founders, and very early stage businesses. To be eligible, you must not have an existing entity (eg a GmbH) and you have to submit a 30-page proposal. If you get selected, you are awarded EUR 125,000 over a year to fund prototyping, salaries, etc.
An equivalent in the EU is the Euro Stars programme: through a simple, one stage application, you can get funded up to EUR 500,000. The conditions are that an entity should be set up already, as you will need to show proof of the business’ financials. As such, it’s a great option if your start-up is a couple of years old, and you want to build a new product line for example.
These grants vary from country to country, so do look into that option where you live to find out about specific programmes!
If you’re looking to go down the venture capital route, but you’re a first time founder, a business angel might be the best option for your business. Not only do you have more of a personal aspect to the relationship with a business angel, they’re also generally more easily accessible.
As I mentioned above, business angels are generally individuals who have founded businesses before and now want to help young founders with their money and expertise. Ideally, the business angel you work with should be in the same industry as you, so you get the most out of their knowledge. Another bonus is if they can assist you with your next funding rounds, by introducing you to VCs for example.
So, how can you go out and find a business angel to support your business? Speak to other founders in the start-up ecosystem, and they will likely have an Excel table full of names of angels and contact details. From your research and that coveted table, identify individuals who might be a good fit, and reach out on LinkedIn. Be honest and upfront about what you want, ask them to meet up for coffee, and create a personal relationship.
The important thing to keep in mind with business angels is setting a ticket size minimum. While it might be tempting to let more people invest EUR 5,000 or EUR 10 000 here or there, it can be harmful to your business’ image. Investors look down on a crowded cap table, and having fewer investors will help the chosen business angels feel more invested in your venture.
Consider your options carefully before you decide to go down the venture capital route. It’s a huge amount of work, often for not a lot of reward.
VCs basically invest in hundreds of companies, with the expectation that at least one can bring back the whole fund. As such, your company needs to display the potential to make enough returns for the fund to take interest. This concept is called the power law distribution; VCs look at your company now, estimate where it’ll be in five years, what their stake in the business would be then, and whether that’s enough to recoup the whole fund.
If you’re considering reaching out to venture capitalists for fundraising, ask yourself whether you have a product that’s really development intensive. If that’s the case, then go to VCs. If you have achieved product-market fit, if your inbox is full of inbound leads without need for marketing and you just need to scale as fast as possible, then VC is the route to follow. Essentially, venture capital gives you speed to scale your business.