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Financing a Startup: Which Is the Right Path to Take?

They have courage, bright ideas, and the will to succeed. But in founding a business, entrepreneurs need to overcome many hurdles. Perhaps the most important is finding the funding. What are the options, and how do they choose the right one for their concept?

22 Feb. 2016

It’s a real paradox. There are now more financing options available to entrepreneurs than ever before. However, according to a 2015 study by German credit institute KfW , the number of startups in Germany experiencing financing problems has risen. To avoid difficulties, business founders should determine their investment needs and start searching for suitable financing options as soon as possible. It is especially difficult in the early stages to convince investors to back a startup. That’s why owner’s equity plays a key role at the beginning.

The state lends a helping hand

However, startup entrepreneurs don’t have to rely solely on their own savings; they can also apply for financial support from the state. There are over 2,000 programs throughout Europe, but funds from state coffers are not simply given away. Those who want a slice of the pie need to take action early on and jump through the bureaucratic hoops. For example, some subsidies require business founders to apply before they begin to work on their project full-time. The state supports new entrepreneurs in several ways, including startup grants , subsidies, and special low-interest credit that can used instead of a conventional bank loan. Banking groups, such as KfW , also offer startup loans. Students have the option to apply for EXIST , a funding program from the German Federal Ministry for Economic Affairs and Energy (BMWi). The BMWi even has an online database to help entrepreneurs find the right program for their needs. It provides an overview of state financing and support programs.

More than just a quick buck

State support can put businesses on sound financial footing. But startups can also obtain cash injections from private investors and investment firms. This approach can definitely pay off as it enables startups avoid conventional financing options such as bank loans. But besides financing, exchanging knowledge with professionals is also crucial for startups. That is why angel investors are in such high demand. They don’t just invest money in new companies; they support them with expertise, too. Venture capital firms also contribute more than just finance and provide startups with entrepreneurial training and valuable contacts.

Getting strategic investors on board

Other popular methods of finding investors are crowdfunding and crowd investing. Crowdfunding platforms such as Kickstarter, Indiegogo, and Startnext enable startup entrepreneurs to present their projects to (mostly private) investors and raise seed capital within a set time frame. If the business fails to reach the predefined sum of money in this time, the investors are refunded their stakes. Crowd investing, on the other hand, is a kind of silent partnership. Using this approach, both private individuals and small enterprises can invest in startups and acquire shares—typically at low sums of money.

May the best startup win

Competitions are an excellent opportunity to get in contact with other entrepreneurs and potential investors and kick-start a business. With a convincing pitch and a bit of luck, the prize money can form the foundations for a startup. One form of funding alone is generally not enough, so startup financing, as is often the case, comes down to finding the right mix.

SCALE11 , the exhibition area at CeBIT dedicated to startups, offers new business founders the ideal platform to meet major figures in business and politics and connect with other entrepreneurs. During the startup pitch and the Founders Fight Club competition—which takes place in a boxing ring—startup entrepreneurs have the chance to present their business ideas and win over investors.