Nothing ventured, nothing gained

Many young founders cannot finance their plans themselves. For them, venture capital is an important help. But when should they resort to it? And what do the investors actually get out of it?

The startup world is populated by many idealists who are convinced that their idea could make the world a better place. With such convictions, it sometimes seems almost beside the point whether you yourself have the money to actually implement such an idea. But you can't do it without investment. In addition to your own money and loans, venture capital is an important financing instrument for founders, especially if the business idea has high growth potential. But those who rely on venture capital should consider a few things. An overview:

What is venture capital?

Venture capital is a form of financing that any business can use. A financier provides a sum of money, in return he receives shares in the company and becomes a shareholder. How many shares he receives for which sum is a matter of negotiation and is closely related to the valuation of the company. However, only very few financiers aim for a majority shareholding. In contrast to other forms of financing, such as a loan, start-up founders do not usually have to pay back the money invested.

Which start-ups need venture capital?

Not every startup needs to rely on venture capital. After all, founders also relinquish some control over their company when they take shares in it. Especially companies that have a profitable, self-sustaining business model early on can also get capital elsewhere. Their founders can go to the bank in the traditional way, for example.

But for companies that are not yet creditworthy, VC is essential. They need investors who are convinced of their idea and believe that the investment will pay off in the medium term.

Basically, venture capitalists look for startups whose business model is scalable, i.e. grows quickly and exponentially. After all, this is the only way they can achieve the desired return on their invested capital in the end. "The right timing is crucial for whether a business idea will fly or not," said venture capitalist Olaf Jacobi of Capnamic Ventures in a recent interview with "Startbase". It is a matter of finding the exact moment when a market explodes, otherwise the costs for the investor would increase significantly.

At what point do start-ups need venture capital?

Venture capital can always be interesting. There are usually three stages at which venture capitalists enter: The seed stage, the early stage and the growth stage.

The seed stage is often before the actual company is founded. Even if there is not much more than the idea yet, companies already need money, for example to develop a prototype. Of course, this is where the risk is highest for backers, meaning that they will demand large company stakes even for smaller investments.

In the early stage, there is at least one product, then it's a matter of building production capacity and acquiring customers. Here, investors expect companies to have already proven that their concept works commercially. Now the goal is to enter the market.

The Growth phase is then about generating growth, entering new markets and expanding. During this period, the risk for investors is increasingly lower; after all, the start-up has already passed some tests. Accordingly, the founders can negotiate better terms for themselves.

Who are the investors?

Venture capital funds, which raise money from investors to invest in startups, are probably the best known. The funds usually have a clear focus. This can be on a certain industry, but also on a certain point in the company's history. Some funds invest primarily in very young companies, while others give money primarily to expansion efforts.

Especially in the seed phase, it can also be worthwhile for founders to rely on a business angel. These are business people - often former founders themselves - who tend to invest small amounts of money, but use it very early on to get an idea off the ground.

Government programs can also help. Currently, for example, there is the program "Invest" of the Federal Ministry of Economics, which distributes grants for venture capital. For this, the founders do not even have to give shares. The development banks of the federal states also provide venture capital for start-ups in their region, as does the KfW development bank, which is active throughout Germany. There is also the Hightech-Gründerfonds, which is also financed by KfW and the Federal Ministry of Economics as well as private partners.

Meanwhile, many large companies are also actively looking for attractive investments. Many have founded their own departments for this purpose, which only focus on the search for start-ups and then support them. Just recently, for example, Bayer bought into the start-up Senti Biosciences.

What do the investors look for?

Every investor's requirements are different, which is why founders should think very carefully beforehand about which one suits them. However, most of them pay attention to some points: "We have a credo that we have been following for years, and that includes three things: team, timing and technology", says VC investor Olaf Jacobi. The team is especially important, he says, because many startups end up failing due to founder disputes.

Until capital actually flows, some time passes. First, confidentiality agreements are signed, then the investor posts a letter of intent formalizing his or her interest in principle. Only then do VCs knock out all the financial and legal aspects before finally drawing up an investment contract.

When do the investors profit?

The investors are looking for an exit, meaning they want to sell their shares at some point for a profit. When and how they do that depends on the company's path. Most plan on three to seven years, depending on whether they got in at the early stage or just the growth stage.

Ideally, the startup will go public at some point, so investors can trade their shares there. Alternatively, another company may take over and buy the investors' shares. Sometimes the founders also decide to buy their shares themselves, thus regaining control of their company.