VC, Accelerators or Crowdinvesting – Which financing option is the “right” one?

02/07/2014  |  Startups

Jens Schleuniger - Managing Director of für-grü (German network for founders)

Jens Schleuniger &#8211; Managing Director of <a href="" target="_blank">für-grü</a> (German network for founders)

Venture capital companies, business angels, accelerators, company builders, incubators, crowdfunding, crowdinvesting, family and friends, personal savings – these days, startups are presented with a broad range of sources for financing their business ideas.

But which option is the best or the right one when it comes to starting out? Finding a clear answer to this fundamental question seems nearly impossible in light of the ever-growing alternatives on offer. The following key points could prove useful in navigating the jungle of options available, and they could ultimately help you when making crucial financing decisions or developing a financial strategy for your business.

1. Your own SWOT analysis as a basis

As with all problem solving measures, getting a good idea of your starting point – that is, analyzing the initial situation – is the best way to approach the issue of financing your business plans. Ask yourself critically and objectively: What are my strengths? What are my weaknesses? What is my operational capacity? How strong and extensive is my personal network? To what extent can I finance my startup myself? Answering these types of questions is the first step on the road to discovering which financing strategy is best for you. The analysis of your strengths and weaknesses is then supplemented by an in-depth look at the opportunities and threats your business could face under the current circumstances.

2. Different investors for the various stages of your business

Possible financing options will change depending on the development phase of your business. Not all investors sponsor startups throughout all of the relevant stages of business. If, for example, financing is needed for the early business development stages, then incubators, accelerators, or company builders are the first port of call. Venture capital companies on the other hand tend to specialize in financing growth. Business angels are yet another story, being a bit more opportunistic in their support of young companies and startups who can present a “proof of concept.” Trying to win over “the crowd” for funding involves being persuasive in presenting the business idea – to move the masses with conviction.

3. Networking and know-how as crucial factors for success

A strong network and specialized know-how are two important ingredients in a company’s recipe for success. Company builders, accelerators, and incubators can generally give access to vast networks, which can be particularly useful to a budding startup. That said, even venture capital companies and business angels often have a lot to offer in terms of networks and expertise. This is quite different from the situation with crowdfunding, where financial resources are the trade-off for not bringing supporting resources like networks and know-how to the table from the outset.

4. Business assessment and the amount of capital needed

The business idea, the team, possible alternatives, and the current phase of the business will shape your approach to the business assessment and the related questions of (1) how much capital is needed and (2) what that might cost in terms of business shares. The following generally applies: the later the business stage, the clearer it becomes whether the business model is being accepted by the market and to what extent this is happening. Theorists would say, the lower the risk, the higher the business assessment (correspondingly). This hasn’t always proven the case in the real world though – especially with ICT business models.

If a startup is successful in bringing investors on board right from the start, with a convincing pitch of the business idea and management setup, it is perfectly reasonable to rate high in the business assessment, even from the very start. A great example of this is crowdinvesting, where companies attain seven-digit company assessments right from the word ‘go’.
A similar rule applies to the amount of capital needed. The earlier the business phase, and, potentially, the more support the startup needs from its partners, the lower the amount of capital made available tends to be. Accelerators, for example, tend to offer startups up to €25,000 in addition to network contacts. A single business angel might invest between €50,000 and €100,000, whereas it isn’t completely unheard of for a venture capital company and crowdinvesting option to drive in sums of over a quarter of a million.

5. A crowd means attracting lots of attention!

Particularly with crowdinvesting, financing becomes a PR event. For B2C business models this financing option can offer lots of additional (marketing) value – the masses are asked to participate in the company which, by default, spells greater popularity while driving in capital – more so than might be the case with a business angel investment.

6. Business freedom that’s partially reined in

When working with an incubator, accelerator or company builder you can assume that developing the business idea will be a cooperative effort. Ideally, it will also be implemented quickly. Of course this also means that the startup can’t make decisions about where to take the business all on its own. This can be an advantage for founders looking for a strong sparring partner who will support them in diverse aspects of the business and help to quickly move the business idea forward. However, for startups that want to keep complete control over the business, venture capital and/or crowdinvesting strategies could give them the freedom they want and need.

Conclusion: There is no one right answer to the question of the “best” financing strategy for a given startup. The extent to which a financial partner should (or might want to) involve itself in the company is a decisive factor. It is also important to factor in whether a proof-of-concept already exists and how much capital is needed to get going. Particularly in the startup phase, a careless financing strategy could lead to a company founder not profiting adequately from any success the company might enjoy. It could also lead – relatively quickly – to the need for additional financing or to limitations in how quickly the company can grow. This is why it is advisable to get an experienced financial advisor on board as early as possible. Someone who can help in the selection of a financing partner, who can weigh the relevant factors and help the startup develop a strategy for attaining the “best possible” results.