Success Factors of Tech Startups (Part 3): The Resources
In this third and last episode of my series on tech startups’ success factors I address the relevant resource a founder team needs to successfully commercialize its idea (jump back to part 1 or part 2 here).
Working with a venture capital fund for over 3 years, the most relevant resource that’s popping up to my mind of course is cash. Without cash, you can’t pay your first class team, develop technologies, sale products, rent an office, throw bbq parties…short:
Cash for startups is like fuel for Formula One cars.
No cash, no race.
But not all cash resources are created equal. There are the right sources for every stage of your startup financing cycle, and the right mixture of those cash resources can decide over success of your startup.
As you can see from the startup financing cycle (picture below), startups with a high growth ambitions typically go through a “valley of death” before breaking even and conquering the market. This valley of death is characterized by a negative total cash flow, i.e. you’re burning money every month, and if nobody finances your company at this stage, your startup will not manage to go through that valley and create value for stakeholders later.
So a lot cash helps a lot? Depends! Remember that — talking venture capital — for each Euro you fundraise, you give away shares of your company. So a comfortable financing helps you growing or breaking even safely, however, you should consider if the price is right. Besides, too much funding can lead to inefficient resource allocations while budgeting and hence, to distractions from focusing. It’s definitely not easy to figure out the right capital need. Therefore, calculate with a safety buffer, accept the investments you really need and bring in investors that are able and willing to provide additional investments in later financing rounds, if needed.
While choosing the right investors group (most of the startup financing rounds nowadays are done by consortia/syndicates) I present the following framework where I project investors into two dimensions: expertise and cash volume.
Business Angels are wealthy private investors, sometimes former industry experts/managers or former entrepreneurs that now like to invest their money into promising startup teams. Since they invest their private money (or the cash of their own investment company) their budget is limited compared to institutional VCs. Business Angels are a definite win for a young founders team since the founder can profit from their investor’s business or technology expertise and mentoring. A good way to get in touch with them is through Business Angel Clubs in/around your town or — even better — through your personal network.
Another group of private investors are the FFF, which stands for “Family, Friends and Fools”. They are one of the first donors to approach and easiest to convince (“fools”), but not necessarily firm of your business.
In cases your private cash suppliers can’t cover you financing need completely, it’s time to approach institutional investors (i.e. venture capital funds). Among those VCs there are early stage investors (so called seed capital funds, like Seed Fonds Aachen or HTGF) that invest, similar to FFF and Business Angels, to help you surviving the valley of death, i.e. developing a product and get ready to enter the market. In addition, later stage venture capital funds are focusing more on market penetration once a product is developed and has reached a relevant customer base. Concrete manifestations of those VCs are what I call General VCs (invest in all kinds of technologies/industries, probably with a geographic focus), Specific VC(invest each in a very small number of industries, like FinTech or AI) and Corporate VCs (a sub-company of a corporation that invests with a strategic purpose regarding the core business model of the mother company, aka CVC).
While all three forms of VCs are comparably well equipped with cash, the Specific VCs — when managed well — can leverage its specific domain knowledge while advocating its investees better than the General VC. Examples for Specific VCs are asgard.vc for AI technologies, Rocket Internetfor eCommerce or Point Nine Capital for SaaS. Nevertheless, Corporate VCs (like statkraftventures for the energy sector or Siemens with its next47initiative) are expected to have an even deeper understanding of their industry thanks to the connection to their mothership, however, I would be cautious with taking CVCs on board at an early stage, since they will have the power to shift the startup’s strategy to no other than their own direction and by this limit your exit potential.
Not in the picture, because there are plenty, are public grants, usually non-dilutive money. It’s hard to plan with grants since their approval depends on many factors, so there is no special strategy for acquiring them. Just try include them into your fundraising in each stage as an additional buffer. For foundations in Germany I recommend the EXIST grant.
For the early stage financing round I recommend a syndication of Business Angels and Seed Capital to reach break even. It’s a combination that provides industry expertise and enough cash resources to also ensure future funding rounds. When it’s about market penetration and expansion, try to go with a Specific VC and refine your business model with your investor’s experts (in addition to General VCs for higher capital need). And when you’re exit ready, search for corporate capital (but be clear about their strategy).
Allora, good luck on your journey from foundation to exit and let me know how it goes.
This story is published in The Startup, Medium’s largest entrepreneurship publication followed by 273,103+ people.
Subscribe to receive our top stories here.
