Business angels are private investors who put their money into start-ups. They generally invest in the very early stages in fast-growing, innovative businesses and are a step down from conventional venture capital investors. Ideally, such funding would take the same shape as the subsequent venture capital investment, i.e. the business angel would buy shares in the business. No money is paid out until completion of the planned exit (by selling the start-up to another company, for example). If the value of the business has risen and the exit is successful, business angels sell their shares along with all other shareholders (founder(s), other investors). They then – hopefully – get back more than they invested. Given the enormous risk, they expect very high returns (in the double digits, at least).
Crowdfunding is obtained via a crowdfunding platform that encourages investments in projects, real estate or start-ups through social media channels. The platform specifies the contracts and advertises the relevant funding in your network in return for a fee. The capital is usually provided by a large number of people who normally invest micro or mini amounts in a coordinated manner, thus raising the required sum as a ‘crowd’.
You take out loans with your normal bank. You agree a fixed term with them whilst you pay back the borrowed money with interest. The amount you have to pay the bank therefore ultimately depends on the amount of the loan. You will need to be able to provide certain collateral (such as assets) to obtain a loan. As a company founder, you are always personally liable, which is also classified as collateral. The bank has no say in your business decisions, but as your lender, you should keep them updated on the performance of your business.
Learn more about development loans and risk mitigation programmes offered by LfA and KfW; they can reduce the default risk for a bank, or you as the borrower may be able to agree more advantageous terms and conditions than the standard market rate of interest.
This type of financing features elements of both equity capital (i.e. an investor shares in the value appreciation) but also third-party loans (borrowings). Mezzanine loans must be paid back within an agreed period, just like other borrowings. The cost of capital is usually a mixture of fixed interest payments that you agree, and a variable component, which might be based on earnings, for example. Generally, whoever is providing the capital has little or no say in how the business is run, i.e. you continue to make all company-related decisions on your own.
Venture capital investors (or venture capital lenders) invest in shares in your company – but only for a limited period. The money is intended to fund strong growth in the value of a business so that it can be sold to another company a couple of years later, earning a big return for all shareholders (founder(s) and investors). The bigger the growth of your start-up, the more an exit in the shape of an initial public offering (IPO) may be planned.
You do not repay any money while the venture capital lenders remain invested in your business. Venture capital lenders are co-shareholders and have – in some cases, extensive – rights to co-determination and control.
A subsidy is a public grant that generally does not have to be paid back. As such, subsidies are the cheapest way to fund a start-up. Subsidies are available for different fields at regional, national or international level. So it is worth taking a bit of time to learn more. Finding out more about possible subsidies early on is particularly crucial as some require applications to be filed prior to incorporating the business.