What does 10x mean in VC terms

Start-up financing cycle: from seed to series A.

Different investors depending on the company phase

“How do I finance my start-up?” Many founders ask us this question. Unfortunately, there is no simple answer to this question Step, however, whether you want to take "outside investors" on board at all or whether you want to bootstrap your own company without investors.

Both ways have advantages and disadvantages. With bootstrapping you don't have to hold an investor accountable (although this doesn't necessarily have to be negative; sometimes the neutral view from the outside helps ...) and you are your own boss. However, if you finance your start-up with the help of investors, you have to give up part of your company. On the other hand, thanks to the financing, you can really get started and at least not have to worry about financial bottlenecks for a certain period of time.

For many start-ups, financing from investors is inevitable. Therefore, in order to shed some light on the darkness, we show a typical financing cycle for a start-up below.

Seed phase: the rocky road to a prototype

To get it straight: the first round of financing, with which you want to finance the way to the first prototype, is the most difficult. After all, it is not yet clear to investors whether the business model will work at all. It is therefore all the more difficult to convince external donors. Attracting business angels as investors is possible at this early stage in the financing cycle, but they too usually want something more tangible than just a business plan or a pitch deck (the exception here are, for example, serial entrepreneurs who have shown that they are How to Build Business Successfully) before considering an investment.

The first phase in the financing cycle is therefore often financed by the founder's own money. Sometimes there are also the three Fs: Family, Friends & Fools. In the case of financing by family members, friends and / or wealthy acquaintances, it is important that the shareholder shares and the competencies of the founding team are clearly regulated from the outset.

In addition to equity, start-ups are also available at discounted promotional loans in the early phase, for which the founder is usually personally liable.

It can also be interesting to apply to an accelerator program, in which the selected start-ups are usually provided with an office free of charge for a certain period of time - usually between three and six months. The greatest added value with an accelerator program, however, is access to the respective network (which usually also includes investors) and feedback from experienced coaches. During this type of "start-up boot camp" you can fine-tune your business model and get the first prototype faster thanks to the support of the accelerator.

Founders who want to minimize business risk right from the start should find out more about incubators. An incubator (a kind of incubator for start-ups) usually offers an “all-round carefree package” for founders who want a strong business partner right from the start. For the start-up capital, support in marketing and sales as well as support in day-to-day business, as a founder you give up a large part of your start-up right from the start.

Start-up phase: Provide proof of concept and get going!

Once the prototype has been created, a first important hurdle has been overcome. But the second follows immediately: The point now is to provide a proof of concept - that is, proof that the business model works. For this phase in the financing cycle for start-ups, additional capital is required, which is usually well into the six-figure range.

Hence the question of how to finance this extremely critical start-up phase. Ultimately, it is now a matter of successfully launching the product on the market and providing the proof of concept.

The answer to this question lies in the first "correct" financing round in the financing cycle. It is important that a start-up is optimally prepared for the upcoming financing round. A meaningful pitch deck is just as important as a convincing elevator pitch. Why? Because the first round of financing is usually financed by business angels, and you come across them especially at pitching events, where various start-ups pitch for the favor of investors.

Incidentally, venture capital funds that also invest in start-ups that are in the early phase, such as the High Tech Gründerfonds, could also be of interest in this relatively early phase.

Once the financing for the start-up phase has been secured and evidence of a functioning business model has been provided, new capital is usually required. This is then ensured by the next financing round in the financing cycle - the Series A.

Roll-out with Series A in the financing cycle

Once the proof of concept has been provided, another important milestone has been reached, which is particularly relevant for venture capital investors. Venture capital companies usually invest through a fund that pursues a specific investment strategy. This often means that proof of a functioning business model must already be available.

However, before you simply write to VC-Fonds XYZ (although personal approach, contact through a recommendation or through your own network such as Xing or LinkedIn is definitely recommended), you should find out more about the respective investor and their investment focus .

With regard to financing through one or more VC funds, it is important to know that thorough preparation is the basis for successful financing. If the basic framework conditions such as the investment case, team etc. are correct, a VC would like to inspect all important documents as part of the due diligence that must be available after the NDA has been signed. In addition, as a start-up you have to have a clear and realistic idea of ​​the company valuation even before the negotiations.

The negotiation process is usually more complex with VC financing than with seed or start-up financing. On the one hand, the now larger company has significantly more contracts etc. to check. On the other hand, contract negotiations are often more difficult because special clauses (such as tag-along etc.) have to be negotiated and one has to agree on rules of procedure, for example.

But if the contract negotiations are positive, you can start! The aim is to use the fresh capital to turn the still tranquil start-up into a successful and serious market participant.

If you are looking for support in addressing investors for Series A, want to be networked directly with the right investors and are looking for experienced contacts for complex requirements from Series A, the Venture Match Service of the Deutsche Börse Venture Network is of interest.

Venture Match Service

Series B growth capital

If you have built up a company with a significant market share that ideally is already operating profitably, the question arises as to whether you want to expand into new markets with the proven business model. If this is the case, the next round of financing in the financing cycle is due: the Series B. Here, of course, existing investors can participate. However, since this round may involve significantly higher financing volumes compared to Series A, private equity funds specializing in growth capital are usually also taken into account.

And what about Series C, D, E ...?

Depending on the business model, further financing rounds are of course conceivable in the financing cycle of a start-up. In our GründerDaily we have a.o. I have also reported on start-ups that have successfully completed a Series E or F.

Normally, the existing investors pull along in these rounds, so that financings in the double-digit million range are possible. Since clearly measurable KPIs are available in this company phase and you already have a basis for the company valuation based on the previous financing rounds, these financing rounds can often be completed within a few months or sometimes even weeks. Good preparation (including the provision of all necessary documents such as annual financial statements, etc.) is also the basic requirement for a quick agreement.

For the really successful start-ups: the IPO

The next step in the financing cycle after a large or several "private" financing rounds can be the IPO. It is particularly exciting that a large number of institutional investors at home and abroad (e.g. investment funds) can be reached through an initial public offering In addition, an IPO is generally a media-effective event that can have a positive effect on the awareness of the company and its attractiveness as an employer and as a business partner.

Anyone looking for an IPO should find out more about the Deutsche Börse Venture Network at an early stage.

Deutsche Börse Venture Network

Conclusion on the financing cycle: the later, the easier and the bigger?

As is so often the case, the first steps in the funding cycle are the most difficult. Especially when it comes to financing your own start-up.

Once you have survived the concept phase - which is usually financed with your own money, with the help of friends and relatives and / or through a promotional loan - the first round of financing usually comes right away, in which "external" investors also participate.

It is not uncommon for this to be a convincing pitch before business fishing, which will hopefully provide a six-figure financing sum. With the fresh capital, the proof of concept should then be provided, which at the same time opens the doors to possible venture capital companies and enables a Series A financing round in the financing cycle.

With the additional capital raised (usually in the single-digit million range), the size of the company is to be expanded significantly and the once small start-up to become a serious market participant. Once this hurdle has been overcome, a large round of financing worth several million euros is available for expansion - e.g. B. in new markets - nothing in the way.

It must be taken into account that the cap table does not become too confusing and complicated in this early phase by pooling business angels or family and Frieds. In later financing rounds, this could be an obstacle for a VC investor to participate in the company.

Author: Für-Gründer.de editors

As editor-in-chief, René Klein has been responsible for the content of the portal and all publications by Für-Gründer.de for over 10 years. He is a regular interlocutor in other media and writes numerous external specialist articles on start-up topics. Before his time as editor-in-chief and co-founder of Für-Gründer.de, he advised listed companies in the field of financial market communication.