Why can’t my startup find funding? Young companies often struggle to raise capital. One reason: many founders don’t understand how investors and banks think, according to Martin Giese and Nicolaj Højer Nielsen. The two investors want to show the path to successful capital raising in their book ‘Startup financing’.
With constant news of million-dollar funding rounds, you might think capital raising is no problem for startups. However, the experiences of many founders tell a different story: the bank won’t give them a loan and investors don’t even reply to their emails. At events, no one with money takes the time to actually listen to the founders’ groundbreaking idea. Why is that?
With their book ‘Startup financing’, Martin Giese and Nicolaj Højer Nielsen want to help startup founders access capital. In the introduction, the authors write:
“For a bank or investor, an idea is nothing more than a risk that must be weighed against potential returns. It’s precisely for this reason that many founders don’t get capital for their business idea.”
If you want investor money, you first need to understand how they think and calculate. The authors therefore focus primarily on presenting the perspectives of different sources of funding. Through their own biographies and around 20 years of experience each in the startup environment, the two authors have learned different viewpoints on startup financing. Giese has been a founder, employee, mentor, coach, and investor in his career. He currently runs the UnternehmerTUM accelerator Xpreneurs. Nielsen founded his first company in 1999 and has since worked as a serial entrepreneur, business angel, and investor. He currently runs the early-stage investor Copenhagen United.
‘Startup financing’ brings together the who’s who of the startup scene
The authors published their 498-page tome in self-publishing fashion in startup style – and you can tell from the somewhat cluttered layout of the table of contents and name index. Once you get used to the mix of main text, case studies, and contributions from startup experts, the book guides the reader through 19 chapters covering the key questions for early-stage startups seeking investors. With practical tips, clear examples, and infographics, the book is entertaining despite its rather dry subject matter.
The authors managed to get countless experts to contribute insights to the book. The list of contributors reads like the who’s who of the (Munich) startup and venture capital scene: Flixbus founder André Schwämmlein, Andreas Unseld from UVC Partners, Celonis co-founder Bastian Nominacher, Baystartup managing director 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 actually needs external capital. Using the burn rate, young founders learn how to assess their capital needs.
The authors then explain the perspectives of different funding sources using the central distinction between risk and (expected) return. Using a simple four-box framework of high and low risk as well as high and low return expectations, different sources of funding can be categorized. This explains, for example, why banks rarely (can) give loans to startups: the return in the form of interest is low, but the risk of the loan defaulting is very high. It would be reckless for a bank to lend money to a newly founded startup. Private participants in a crowdfunding campaign, on the other hand, are willing to take on a high default risk and expect only a low return in the form of the finished product, because they want to help the product come to life. Venture capital investors are willing to take on high risk but want to see high returns. The authors work through the perspectives of all potential funding sources for startups in this way.
Ideas are risky
From a founder’s perspective, the key is to reduce the risk as perceived by the investor. The riskier an investment appears, the harder it becomes to find a funder and the more expensive it gets – in the form of higher equity stakes that founders must give up, stricter clauses in the investment agreement, or the like.
A pure business idea is initially extremely risky: there’s no proof that there’s actually a market for the idea, the founders haven’t shown what they’re capable of, and there’s no evidence that the product can actually work technically. Return expectations are completely uncertain. Before approaching a professional investor, founders should therefore first provide evidence that supports success and makes the risk calculable.
The investor, an unknown creature
The book becomes particularly concrete in its tips on how founders should approach investors. Sample emails help with contacting investors. Six complete pitch decks that were successfully used to raise venture capital are printed in the book. Startups get very concrete support here for well-prepared initial contact with investors.
‘Startup financing’ also helps determine realistic valuations. It also presents various investment models and contract templates, warns of potential pitfalls, and offers tips on contract negotiations with investors.
The book offers pretty much exactly what it promises in the subtitle: ‘practical tips from investors for founders’. It contains the knowledge that founders of early-stage startups with capital needs require – while maintaining a balance between detailed insights, clear presentation, and practical relevance.
‘Startup financing: Your insider guide. Practical tips from investors for founders’ (498 pages) is available as hardcover and Kindle ebook.
