As a company by entrepreneurs for entrepreneurs, one question we get asked time and time again is: How do I find investors for my company? We believe that the best strategy is a common sense one, tailored to Germany’s cultural idiosyncrasies. Here we teach you company fundraising 101 with a German flavour.
1. Preparing to search for investors
In Germany, investors who is ready and willing to fund companies are hard to come by. You need a methodical plan of attack.
First, ask yourself: What are my needs and desires? You need to clear about this so you can seek out investors that are a good match for your company.
What are the most common investor types?
|Venture Capitalists||VCs are professional investors who invest in companies with high growth potential in exchange for a shareholding. As the investments are often high-risk, they are referred to as venture capitalists.|
|Micro Investors & Crowdfunding||Micro ventures or mini investments are often made as part of crowdfunding campaigns. The investors are usually made up of interested private individuals, occasional investors and professional investors.|
|Business Angels & Founding Angels||Angel investors often support companies at a very early stage of development or even before formation. Often these angels are themselves experienced entrepreneurs who offer their know-how and access to their network in addition to funding.|
|Friends & Family||Collecting loans and cash from family, friends or acquaintances is a popular method of remaining independent of external financiers.|
Venture capitalists: no-nonsense professionals
Venture capital (VC) or private equity is over-the-counter investment capital. Private individuals or VC companies act as financiers, supporting startups and other technology companies with equity, convertible bonds or mezzanine capital. This gives them a say in entrepreneurial decisions.
The risk for investors is that the development of the companies is unpredictable. That is why VC investors expect high returns on exit or IPO when the business is doing well. Often, but not necessarily, private investors also provide their knowledge as external advisers.
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VCs in Germany
Access to venture capital in the growth phase is a strong success factor. But, venture capital is still far less in circulation in Germany than in overseas markets.
According to the results of the Deutscher Startup Monitor 2020 (DSM), the share of VC investments is rising again somewhat as a source of funding: 18.6% of the companies surveyed reported receiving venture capital. In the previous year, the share of VC recipients was 14.6%.
The monitor also shows that location plays a key role here: About one in four VC recipients are based in Berlin, while only about 11% of founding teams from the Rhine/Ruhr metropolitan region reported raising venture capital.
Business and Founding Angels: the high-net-worth individual as coach
Business angels, also known as angel investors, are very popular capital providers, as they almost always offer their knowledge as a coach in addition to their capital. The collective term usually refers to managers, industry experts or business people who want to support young companies.
Founding angels belong to the same category but enter as investors or even co-founders before the formation. The main difference to the VC donor is the timing of the investment: normally, entrepreneurial angels support startups at a very early stage and are more involved in the development phase. The risk of the investment is therefore higher – as is the interest rate.
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Angel investors in Germany
German angel investors are often organised in (regional) networks or associations through. They can also be found at trade fairs and conferences or as jury members for competitions.
You should check the event calendar of different angel investor network. Many offer matching events for which you can apply.
Micro investors & crowdfunding: people power
The success of crowdfunding is based on the mass of backers, with each individual making only a small investment in return for a small reward – scaled according to the size of the donation.
Kickstarter, Startnext, Seedmatch and Companisto are just some of the platforms that can be used to create and spread a crowdfunding campaign in Germany.
Campaigns can thus collect considerable sums through their reach and many individual micro-investments. Clever marketing and ambitious networking is a must to increase the reach to potential micro-investors.
Here are tips for your successful campaign. Although money from the masses remains popular, the big hype has faded. This is because platform-based fundraising has one big catch: if the minimum fundraising target is missed by the campaign’s deadline then it could all be for nothing.
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There are also micro-investments in the venture capital segment, which are typically made in the seed stage of a startup. They are usually below the €50,000 threshold. In Germany, this type of financing has so far been a rather rare source for startups.
Friends & Family: Capital from your inner circle
According to DSM20, every fourth startup asks friends and family for a financial injection. Borrowing from one’s inner circle carries risks beyond the financial. It means business failure can also be a catastrophe for your personal life. Many entrepreneurs nevertheless still pursue this source of financing. So how can you prevent potential conflicts down the track?
If you want to borrow money from your loved ones, you should follow a few golden rules:
- Talk openly about risks and inform the financier which scenarios are possible (e.g. insolvency of the business).
- Draw up a written agreement in which the conditions are contractually clear. A symbolic handshake is not enough.
- Put all your cards on the table. Not only the professional investor wants to be informed about developments, but also the financiers from your private life. Openness creates trust and prevents disappointment – in case you don’t bring good news.
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ICO and STO: financing through cryptocurrency
Initial Coin Offering (ICO) and Security Token Offering (STO) are among the latest possibilities for corporate financing. Here, instead of securities, companies issue a new cryptocurrency that investors can buy – analogous to a classic IPO. Most of the projects financed are based on blockchain and other new technologies. Until recently, the coin and token market were detached from the stock market and its strict rules.
However, this was precisely the problem: a lack of regulation caused the first ICO bubble to burst. Through stricter regulations, the security token should now offer investors more security and startups more sustainable chances of success.
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2. Where can I find interested investors?
Once you know who you would like to attract as investors then locate the desired investor group. Where are they and how can you make them aware of your company?
Research in the press and social media
Who is currently investing how much money in new companies in your sector? Many German investors invest in familiar terrain that they feel confident about. Needlessly to say, it’s your job to find out who the investors that invest in your type of business are.
Like most things in life, it’s important to do your homework: read trade media and startup blogs. Newsletters and Google News subscriptions can help you get the knowledge you need. This way you can develop a more targeted strategy instead of stumbling around in the dark.
Build a network
Networking is a new term for an old discipline. If you know a lot of people, you improve your chances of making a name for yourself and getting introduced to the right people.
Press contacts are also part of this. Do you know the media that provide content that is particularly relevant to your industry? You can also raise your profile through interviews or other mentions that investors find during initial research. Therefore, don’t exclude anyone just because they don’t fit the profile of your search.
Word-of-mouth marketing also offers many opportunities in the microcosm at conferences and events: talk openly about the fact that you are in a critical growth phase and are looking for an investor.
Participate in events
If the investor won’t come to you, go to where the investors are. Throughout the year, there are countless events across and beyond Germany designed just for this:
- Startup competitions
- Angel investor get-togethers
- Venture Lounges
- Trade fairs (Messen)
This huge choice does not only have advantages – it can also quickly overwhelm founders. If you participate in everything you will burn through time and money.
Therefore, be strategic and look specifically relevant to your goals. If you also find an event that is directly related to your industry, you will significantly increase your chances of finding investors. But, you should not completely exclude other conferences either. Here you can make initial contacts and get a feel for the current dynamics between funders and potential ventures. Ultimately, expanding your network is always valuable and serves as an exercise for your self-presentation.
3. How should I contact investors?
Once you have developed a list of interesting potential backers, make contact. Preparation is everything because there is no second chance for a first impression.
Search your network: Who knows someone who knows someone?
Contacts give you credibility and open doors that would otherwise remain closed. This motto also applies when looking for a suitable investor. Do you know someone who is already acquainted with your targeted investor? If so, you should use this existing connection to make the first contact. Be critical when evaluating whether to leverage a connection.
- How well does your acquaintance know the investor?
- Is the relationship professional or private?
- Is there a danger that the contact could ruin your chances?
- Does the acquaintance have the skills to help you with an initial contact?
From the answers, you should be able to conclude whether the intermediary is a good option. However, control how the introduction is to be carried out in concrete terms. If doubts arise, it is better to keep your distance.
Direct approach at events: Have courage, young blood
Professional investors don’t go to trade fairs and startup events for fun. Before you approach an interesting investor, you have to train for moments like these: A concise short presentation (elevator pitch) of the business model and the products should come naturally.
If you receive a rejection for a meeting, remain polite and move on. Rejection is all part of the game so learn how to constructively deal with it as quickly as you can.
Classic acquisition: Nothing to lose and everything to gain
A good old fashion phone call might even help you stand out from the crowd because few take this bold step to find an investor. But again, make sure you’re mentally prepared for rejection – remember, fundraising is in more ways than one a numbers game.
4. How can I persuade investors?
This is where things get real – getting the investor excited about your company. But how? This is a question you can best answer yourself. What would convince you to invest in a budding startup team with a promising business idea?
You’ll be expected to turn up at an investor meeting with a up-to-date business plan and a pitch deck. But, don’t reinvent the wheel – most German investors are fairly conservative. Get creative but within certain constraints. If you don’t know where to start, there are many resources that want to help international founders put together a pitch deck that’ll impress German investors. But, no matter what you do, keep these things in mind:
- Every industry has its own rules. Seek out experiences that will help you learn what they are. Always adapt your presentation to the business sector and your current audience.
- Never underestimate your counterpart. Research him or her thoroughly. This will help you avoid embarrassing mistakes or unpleasant surprises.
- Less is not more. If you ask for too little money, you risk disappointment on both sides. Calculate your capital requirements realistically and without false modesty.
- Practice makes perfect. It is not only the presentation that has to be right, but also your answers to possible questions from the investor. With good preparation, you can handle anything thrown your way with confidence.
- The first attempt will be a huge learning curve. Don’t be discouraged if your first investor meeting doesn’t work out. Finding suitable investors is usually more like a marathon than a sprint. And, dealing with investors is no cake-walk – you’ll need to grow a thick skin if you want to be successful.
5. What should I do when an investor wants to give me money?
When you do find an investor willing to invest your business – don’t get carried away, but always cross the finish line with caution. Taking on an investor is one of the most consequential decisions you’ll make as a business person. Make sure you answer the following questions as objectively as possible:
- Is the investor a serious person and does he/she act flakey?
- Are the conditions of the offer fair?
- What is the interest rate?
- How is the profit-sharing calculated?
- What is the extent of co-determination rights
- Have opportunities and risks been discussed openly and honestly?
If the answers include “No” or “I’m not sure”, it may be worthwhile to have an external assessment. It is better to invest a few hundred € in an adviser to point out possible stumbling blocks before you conclude any investor contract.
Other financing strategies: Investors aren’t the the be-all and end-all
Investors are not the only possible solutions for financial bottlenecks. Government funding or strict bootstrapping are other alternatives to investors.
Subsidies and microcredits: capital from the public sector
The most traditional method of financing outside the investor arena is the development loan. Regardless of whether you prefer a smaller development bank, the KfW or other public funding agencies: the options are very diverse. Especially specialised programmes that are not well-advertised offer opportunities (and full pots of money) for resourceful founders. The prerequisite is good research work to find appropriate projects.
Those who have already received a promise of money from a venture capitalist or business angel can be doubly pleased: the Federal Ministry for Economic Affairs and Energy (BMWi) subsidises the participation of private investors with 20% within the framework of the INVEST programme.
Those who do not need so much startup capital should look for a microloan: these smaller loans (€1,000 – 20,000) come from the Microloan Fund Germany. The loan applications are processed through GRENKE Bank AG or accredited microfinance institutions (MFIs). Most recently, the approval rate was 34% according to the BMWi (as of Q4 2018 /Q1 2019). Microloans are very popular and the annual quota of loan amounts is capped. Therefore, competition among applicants is correspondingly high.
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Bootstrapping: Economising with equity capital
The bootstrap method is nothing more than the philosophy of self-financing – without investors or bank loans. Founders use this method above all when financial independence is a priority or when they simply cannot find an investor.
By bootstrapping, quite a few startups force themselves to enter the operational business quickly and invest few resources in planning and development. In this way, revenues can be generated as quickly as possible. Outsourcing is a crucial factor because personnel costs are an Achilles heel in bootstrapping.
Those who bootstrap first build up capital reserves instead of distributing profits. For the founding team, this means that the first few years will probably yield little or nothing, even if the company is already profitable.
Incidentally, the lean startup method is startup model that uses a mixture of a lean, self-financed start and a subsequent financing phase.
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If you’re in the early stages of founding your company in Germany, read this too: When should I incorporate my startup? Incorporating in Germany pre- vs post-funding
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