Fundraising and grants
Raise funds from investors to accelerate your business development
While some entrepreneurs bootstrap their business, most of them offer a stake in their startup or spin-off in exchange for capital. The main reason is that the additional capital helps founders to scale their business faster by accelerating business activities in sales, marketing, operations and R&D. Hence, the additional funds enable a startup to enter the market faster and gain market share more quickly, as well as to build competitive advantages over the competition.
On this page you will find answers to the following questions:
- How to run a structured and efficient fundraising process?
- How to increase the attractiveness of your startup?
- How to find the right investors for your venture?
- How to close a deal?
Increase your chances of obtaining fair financing by means of a clear and structured process
Raising capital is a specific sales process. Instead of selling your product or service, you offer investors shares in your company at a freely negotiable price. The demand for your shares and the price paid for them depend heavily on your ability to demonstrate the potential of your startup while lowering the risks associated with an investment. The higher the expected return and the lower the perceived risk of an investment, the more an investor is willing to pay for company shares. In our capital raising process, we therefore first take the necessary steps to clearly demonstrate the potential of your startup and lower the investment risk. This approach significantly increases your chances of efficiently raising capital at a fair valuation.
The five-step process is illustrated below. A more detailed description of the individual steps can be found in the following sections.
We first start with an assessment of potential funding opportunities and your current operational as well as financial situation. The aim of this assessment is to derive a suitable fundraising strategy for your startup or spin-off and identify the right levers to increase the value of your business during the process while reducing risks. As specialists, we need around two to three days to accomplish this task.
Assess your financials and runway
Your financial performance, situation and outlook have an impact on your fundraising strategy and options. You should have a runway of at least 9 months, ideally 12, when you start a financing round for your startup or spin-off. When your company has sufficient time to go through the fundraising process then you can optimally time, prepare and execute the fundraising process. The financial assessment involves the following:
- Benchmarking : Comparing your performance with that of your competitors and industry peers will help you identify your startup's strengths and weaknesses. Then you will know where to prioritise to improve operational and financial metrics before the fundraising process. Knowing how your key metrics are performing will also help you predict and make the case for your company's future operational and financial performance.
- Assessing valuation : A solid understanding of your current market value will help you structure the funding round and implement short-term strategies to improve the metrics that determine your valuation. Depending on the stage of your startup, different valuation methods are applicable. A multi-valuation approach reduces the risk of misvaluations.
- Identify value inflection points : The value of your startup develops non-linearly. Moving beyond critical stages such as minimum viable product, proof of concept, first pilots, proof of market or validation of your business model reduces the investment risk and thus significantly increases the value of your company. The right timing of your funding rounds can therefore significantly reduce your financing costs.
Analyse your product-market-fit of product or service
Finding product-market-fit means that your value proposition, your customers and your sales channels are in alignment. This state is best described as your customers becoming your best salespeople.
As a startup or spin-off, you have found product-market fit when,
- Reporters and investors call because they've heard about your hot new thing and want to talk to you about it.
- Existing users recognise the value of your product
- Customers tell others about their great experience with the product
- Your startup or spin-off replicates the great experience for others.
- Your startup or spin-off replicates the great experience for the new users.
- Customers buy the product as fast as you can make it, or usage grows as fast as you can add more servers
- Money from customers piles up in your company account
- You hire sales and customer support staff as fast as you can
You can tell when the product-market fit for your company is not yet there when,
- Customers don't see any real benefit from the product
- Word of mouth doesn't spread
- Usage is not growing as fast
- The press is not covering your startup or are boring
- The sales cycle takes too long
- Many deals are never closed
Check your funding options as a startup and spin-off
Bootstrapping is a process where you build your startup with your own money and the money that comes in from the first customers and sales. This option is particularly suitable for founders who do not want to give away company shares and for whom the speed of company development is secondary.
b) Angel investorsAn angel investor is usually a wealthy person who invests in startups in return for a stake in the startup or spin-off. They are usually individuals who seek a higher return in return for the higher risk than would be the case with more traditional investments.
c) Venture capital
Venture capital is a form of private equity and a type of financing that investors provide to startups and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks, and any other financial institutions. However, it does not always take a monetary form; it can also be provided in the form of technical or managerial expertise.
A startup accelerator is an organization that offers mentorship, capital, and connections to investors and business partners. It’s designed for selected startups with promising founders and minimum viable products, as a way to rapidly scale growth.
An incubator is an organization designed to help startup businesses grow and succeed by providing free or low-cost workspace, mentorship, expertise, access to investors, and in some cases, working capital in the form of a loan. You’ll work around other entrepreneurial businesses, often with a similar focus as yours.
Under most conditions, a grant is a gift that does not have to be paid back. It is provided to a startup to facilitate a goal or incentivize performance.
g) Commercial loans
A commercial loan is a debt-based funding between a business and a bank. It is typically used to fund major capital expenditures and/or cover operational costs that the company may otherwise be unable to afford. Expensive upfront costs and regulatory hurdles often prevent small businesses from having direct access to bond and equity markets for financing.
h) Venture debt
Venture debt is a type of debt financing obtained by startups. This is typically used as a complementary method to equity venture financing. Venture debt can be provided by both banks specializing in venture lending and non-bank lenders. Venture debt can be a viable alternative to equity venture financing. Similar to other methods of debt financing, a primary benefit is preventing the further dilution of the equity stake of a company’s existing investors, including its employees.
i) Initial public offering
An initial public offering (IPO) refers to the process of offering shares to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. Startups must meet requirements by exchanges and the Securities and Exchange Commission (SEC) to hold an initial public offering (IPO).
Know your industry & market
A thorough understanding of your market enables you to formulate a winning strategy with a clear vision for your team and potential investors. With a clear positioning in your market you will be able to generate outstanding operational metrics and experience revenue growth that motivates everyone to be part of your venture. Investors mainly focus on the following topics:
- Market size : A simple and effective way to start estimating your market size is to multiply the number of potential customers out there by the average achievable annual revenue spent on your product. A more detailed analysis of the total addressable market (TAM), the serviceable addressable market (SAM) and the serviceable reachable market (SOM) will provide you with valuable insights to further develop your business and product roadmap. Most venture capitalists prefer large markets to niche markets. As a rule of thumb, targeting a USD 2 billion market will attract the attention of a professional VC.
- Market growth : Research reports provide a good source to find the market growth figures of your industry. In a rapidly developing market, it is easier to attract new customers than in a stable or even declining market. The growth rates in your market and industry should be at least 10%.
- Market trends : Markets are in a constant state of flux. Therefore, a solid understanding and idea of how customer behaviour changes over time and what kind of technologies and new products emerge that influence the market dynamics of your market and industry is relevant here. Investors will test and challenge your thoughts in this domain right from the beginning.
- Competition : It is extremely rare to enter a market without existing competition. Even if you have identified a completely new market, over time existing and new players are going to enter if the market is also attractive enough. Therefore, professional investors will ask about your unique selling propositions (USPs) and how you will successfully defend them against other market players. What investors want to hear in particular is what makes your product or service lastingly faster, better and cheaper than that of the competition.
- Customers: A thorough understanding of your customers' needs and buying behaviour is required to develop a product and service that they love and that basically sells itself. Your go-to-market strategy and product roadmap should to a large extent reflect this understanding.
What role does your startup want to play in 10 years?
Do you want to be one of the main players or part of another company?
It is of course difficult to predict what will happen in the coming decade. But nevertheless, you should have an idea of how your industry will develop and what role you want to play in it with your company.
Challenge your selected strategy & business model
A great strategy passes the following tests
- it targets a large market with customers who care about your offering
- it provides you an edge over competitors
- it is simply understandable
- it drives sustainable growth in revenue and gross margins
- it guides you in organizational decisions, such as hiring employees and develop new product features
Identify gaps in your team and network
Early-stage investors are more likely to put their money into a start-up with a great team and an average offering than the other way around. Therefore, it is important that the key functions of your business, such as strategy, sales and marketing, and research and development, are covered by a knowledgeable and experienced team. Additionally, a strong advisory board is valuable for investors as these advisors can open doors and support with their entrepreneurial experience especially in the strategy and scaling of a company.
If a key person is missing, you should react as quickly as possible. Telling investors that you will hire that person as soon as you have the money from them is often not the right strategy. It signals that you are not willing to take risks and buy into your vision before the funding round is complete.
Check legal status of your startup or spin-off
While the first legal tasks such as company foundation, standard work contracts, etc are simple and can be done by any lawyer, things start to get more challenging once you do financing rounds: Drafting shareholders’ agreements, incentive schemes for employees etc. that don’t backfire in later financing rounds is important.
So you definitely want to have a lawyer on your side who is experienced with startup financing rounds.
How do you select a great lawyer if you don’t have one yet?
- Ask a few entrepreneurs or investors in your ecosystem with which lawyer they work. Check their website and shortlist lawyers where you see the best match
- Set up short video calls with short-listed lawyers, and make sure you discuss their experience with startup financing, incentive schemes, network to investors, cost structure and team composition
- Take your decision and include your gut feeling in it
Once you have selected a lawyer, have her/him review your current shareholders’ agreement. Make sure you have a solid version of agreement in place. Typically the shareholders’ agreement of an upcoming financing round will be based on the current one, so having a good starting point is valuable.
Refine your strategy
A business strategy is a plan of how a company is setting out to achieve its goals. In the best-case scenario, it clearly outlines your company's USPs and includes a plan for how you will defend them against your competitors. A well-crafted strategy is vital for any company to experience rapid growth and become an attractive target for investors. Strategy formulation is an iterative process and not a one-time event. You should therefore involve your best team members and keep refining your strategy continuously.
To formulate the strategy, you can follow the process described below,
1) Conduct SWT analysis
Performing a SWT assessment will help you understand your strengths, weaknesses and the trends in your industry and market. This assessment will provide you with a picture of the current environment and how it will evolve over time.
2) Develop a one page vision summary
A good vision summary builds engagement, alignment, and focus throughout the company. It provides a one-page format to communicate key aspects of your company's vision to employees, customers, investors and the wider community. The process for creating a vision summary is described below. The results can be inserted into a template, which is recorded here,
a) List core values
These are the rules and boundaries that define your startup's culture and personality. It refers to your company’s should and shouldn't. Your organization's values should be so deeply ingrained in the company that you will feel comfortable referring employees to them when faced with a tough decision or ethical dilemma.
b) State purpose
It conveys your startup's reason for existence, just as the mission statement and vision do. But it also shows the connection between your brand identity and the workplace culture of your company. It combines the components of a mission statement, vision, and values into a single statement.
c) Define brand promise
It is a value or experience that your customers can expect to receive every time they interact with your company. As startups deliver on their promise, the brand value becomes stronger in the minds of their customers and employees.
d) Set a big hairy audacious goal
A big hairy audacious goal is a clear and compelling goal for your organization. BHAG should take people out of short-term thinking. The time limit for the same is considered to be ten years or more (Collins & Porras, 1994).
3) Set the right priorities
Write down your priorities. Where you should focus for the next quarter, year, and three to five years. With the help of your vision summary, knowing where to focus becomes much easier
It is the job of the CEO to delegate responsibilities to employees. The CEO can discuss and delegate tasks to each employee according to their abilities. Delegating the task to the right person will help the startup reach the main goals faster.
After following the given procedure, you should ask yourself, is it easy for everyone to understand your vision summary? If not, get recommendations from your people to make it easier for everyone to understand. Strategy is considered one of the four essential elements of an organization. Therefore, a well-crafted strategy will demonstrate that you serve a large and lucrative market. It further guides you in creating and maintaining your USPs as well as taking daily business decisions in line with your objectives.
Refine your business model
What is a business model and why is it important for your business?
A business model is the core strategy of a company to make a profit. The key inputs of any business model are the products and services to be sold, the target markets and customer profiles, and finally the pricing and expenses. Your business model has a major impact on the scalability and profitability of your business, two components that venture capitalists evaluate in depth. Therefore, creating a strong business model helps to achieve rapid growth with low capital expenditure in order to subsequently attract large investors. Below we outline our process for creating or refining your business model.
The starting point for creating or refining your business model is to choose a good base model before you get into the details. The base model should be attractive to your customers, allow you to generate a profit in the long term, be scalable and, in the best case, give you a competitive advantage over your competitors. According to the St. Gallen Business Navigator, there are 60 different business model types from which you can choose. Below you will find a summary of each business model type together with its particular strengths and the required skills on your part.