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Startup Financing: What Investors Want

Why can’t my startup find investors? Young companies often have a tough time finding capital. One reason why: According to Martin Giese and Nicolaj Højer Nielsen, a lot of founders don’t understand how investors and banks think. With their book “Startup Financing” (only available in German under the title “Startup Finanzierung”), the two investors would like to pave the way to successfully raising capital.

With non-stop news about multi-million financing rounds, it almost seems like looking for capital isn’t much of a problem for startups. What a lot of founders actually experience looks quite different: Banks don’t grant them loans and investors don’t even answer their emails. At events, none of the investors really take the time to even listen to the founders’ groundbreaking ideas. Why is that?

With their book “Startup Financing,” Martin Giese and Nicolaj Højer Nielsen want to help startup founders get their hands on capital. In the introduction, the authors write:

“For a bank or investor, an idea is essentially a risk that needs to be carefully weighed against potential return. That is exactly why a lot of founders don’t receive money for their business ideas.”

Those wanting to access investors’ funds first have to understand how investors think and calculate, which is why the authors primarily communicate the perspectives of different investors. Through their own biographies and roughly 20 years of experience each in the startup scene, both authors are familiar with viewing startup financing from different angles. Giese has already been a founder, employee, mentor, coach and investor in his lifetime. He currently runs the UnternehmerTUM Accelerator Xpreneurs. Nielsen founded his first company in 1999 and has since been active as a serial founder, business angel and investor. He currently runs the early stage investment firm Copenhagen United.

“Startup Financing” gathers the who’s who list of the startup scene

The authors published their 498-page tome of a book themselves in true startup fashion — and the somewhat confusing layout of the table of contents and name index makes that most apparent. As soon as you become accustomed to the juxtaposition of actual text, case studies and stories from startup experts, the 19 chapters of the book lead you through the most important issues early-stage startups face when looking for investors. Practical tips, clear examples and infographics turn a rather dry topic into an entertaining read.

The authors also managed to convince countless experts to add their insights to the book. The name index of those who contributed reads like a who’s who list of the (Munich) startup and venture capital scene: Flixbus founder André Schwämmlein, Andreas Unseld from UVC Partners, Celonis co-founder Bastian Nominacher, Baystartup CEO Carsten Rudolph, attorney Christoph von Einem, Bits & Pretzels host and investor Felix Haas, Personio founder Hanno Renner, founder, investor and mentor Jeff Burton, Inveox founder Maria Sievert, Mr Beam founder Teja Philipp and Veronika Riederle, founder of Demodesk — to name just a few.

Risk vs. return

The book begins with the question of whether and when a startup needs external capital. Using the burn rate, young founders learn how to gauge their need for capital.

The authors then explain different investors’ points of view by means of the main distinction between risk and (expected) return. A simple four-field graphic depicting high and low risk as well as high and low return expectations helps to classify the different sources of financing. That explains, for example, why banks very rarely (can) give startups a loan: Return in the form of interest is low, and the risk of the loan defaulting is very high. It would therefore be negligent for the bank to loan money to a startup that was just recently founded. In contrast, private individuals who participate in a crowdfunding campaign are prepared to shoulder a high default risk while also only expecting a modest return, for example in the form of a final product, because they want to help that product become a reality. Venture capital investors are prepared to take on significant risk, but also want to achieve high returns. That is how the authors run through the perspectives of all potential financial backers for startups.

Ideas are risky

The trick is for the founder to reduce the risk from the investor’s perspective. The riskier an investment appears, the more difficult it becomes to find a financial sponsor and the higher the costs — for example in the form of larger amounts of shares that founders have to hand over or stricter conditions in the participation agreement.

A business idea on its own is extremely risky to begin with: It hasn’t been proven yet that there’s an actual market for the product, the founders haven’t been able to demonstrate what they can do and they also haven’t proven that the product even functions technically. And the expected return is also completely uncertain. Before founders speak with a professional investor, they should first supply evidence that speaks in favor of the company’s success and makes risk calculable.

The investor — a mysterious creature

The book gives very specific tips on how founders should approach investors. Example emails help establish contact with investors. Six complete pitch decks are also printed in the book that were successful in collecting actual venture capital. Startups are given very specific support on how to properly prepare for establishing contact with investors.

“Startup Financing” also helps calculate a realistic valuation. The book further supplies various investment models and contract templates, warns about possible pitfalls and shares tips about negotiating contracts with investors.

The book quite accurately delivers what its promises in its subheading: “Practical tips from investors for founders.” It contains all the information founders of early-stage startups with capital requirements need — and maintains the balance between detailed insight, a clear overview and practical relevance.

“Startup Financing: Your Insider Guide. Practical tips from investors for founders” (498 pages) is available only in German (Startup Finanzierung: Dein Insider-Guide. Praxis-Tipps von Investoren für Grunderinnen und Gründer) as a hardback or eBook for Kindle.