Lars Hinrichs’ latest guest commentary focuses on the important growth phase for founders and how this can be successful. In his earlier contribution to Hamburg News, the focus was on learning from mistakes and perseverance in the face of adversity. Hinrichs noted: “The times when you just presented a business plan and obtained money for it are over.”
By Lars Hinrichs
The question of when the growth phase begins and the exact timing of start-up or follow-up financing comes first. That depends on whether the funds collected are for a round of angels or a bootstrapping or whether you want to get by without any external financing. Business angels are, of course, useful. They can offer financial support as a private investor i.e. and participate in a company and contribute know-how and their own network of contacts to the start-up at the same time. A business angel typically joins during the company’s early stages.
1. Neither too little nor too much money
Then the next question a founder should ask is: “How do I get money – via an accelerator, a private investor or through the typical three Fs. ‘Fools, Friends and Family’”. That is a common form of financing. But family, friends and acquaintances lend both financial and ideal support. This is a quick way of finding money and there is little or no interest involved.
Then there is the question of how much time a founder has. And this is where the first big mistakes, which can impact the company’s lasting progress, are made: If a founder has too much money, the issue may be whether they have given up too many shares and perhaps may not learn to manage money. If a founder has too little money, then they are immediately back in the fundraising mode and hunting for capital.
2. Plan rounds precisely
That varies from product to product and there is no golden rule. The company has to be planned in the long term and questions about the meaning of rounds one and two have to be asked and whether a third round is required – or even a fourth or fifth round. These rounds are experiences during which the company changes sustainedly again.
E and F rounds can follow smoothly. Xing had two angel rounds – a financing round or B round followed by the initial public offering round. That was very rapid and is quite unusual. However, it helps when the company generates cash rather than simply burning money. If, for instance, a prototype is developed in the bootstrapping phase, then there is the issue of follow-up financing to make the whole thing marketable. If it’s a software product, then things move fairly quickly, but B2B takes longer. Naturally, there is no rule of thumb that applies to every company.
3. Give up no more than 20 per cent
If you already have a product and can present the initial figures, that’s very good as the rating is quite high. However, having nothing to show usually means the rating is not so good. In my view, one should give up a 10 to 15 per share of participation to get the angels on board. But things may become difficult, if the angels get over 20 per cent in the initial financing round. It depends on what they are offering. If you start with just an idea, then you will certainly have to give up more than you would with an existing product. The times when merely presenting an idea and a business plan sufficed to obtain money are over. That no longer works.
4. Market orientation
New trends such as the wave of FinTech foundings are constantly coming on the market. Meantime, the insurance sector is following suit with start-ups as well. I am financing one of these start-ups. And now after six years, it is beginning to take off. Scores of companies spend years working on a product that nobody knows anything about. Market orientation is crucial and you should not be distracted by short-term trends.
Big conferences with pitches such as the recent South by Southwest in the U.S. usually focus on launching software and securing follow-up financing. Many of today’s successful applications saw the first light of day there.
5. Using networks
An entrepreneur, who believes in his/her idea, must be able to get other people excited as well. At present, there are sufficient networks and assistance in Hamburg and even suitable programmes for students at university in the city. There couldn’t be more help. Yet, most of those firms fail. Hopefully, people will at least learn something from those experiences and are not discouraged.