How to finance startups: from bootstrapping to crowdfunding

Carsten Lexa
4 min readFeb 25, 2018

No matter how good a business idea may be, without capital it will be hard to turn the idea into a business. Fortunately, there are now a variety of financing options for founders. However, not every one of them fits in with their own concept — so it is important to weigh the chances and risks of each form of financing. Below is a brief overview of the most important types of startup financing — omitting the classic loan (from the bank or from friends / family) in this overview.

1. Bootstrapping

This is the term for a company that is founded entirely without outside capital. In a nutshell, you try to achieve as much as you can for your business with as little money as possible. So it’s about keeping the costs as small as possible, doing as much as you can yourself and earning (small) revenue and ultimately profits as quickly as possible. Bootstrapping is often not only a thoughtful model, but a necessity for many founders. However, the high burdens on the founders and the limited development potential of the company pose risks that may eventually take their toll (on founders and the company).

2. Venture capital

Venture capital means “money for shares”. Investors provide money to a startup, closing financing gaps and financing its expansion in the long term. Unlike traditional bank financing, venture capital is not a loan. In contrast, investors participate directly in the startup and take the risk that the startup fails and their investment is lost. Often connected with the investment is also a certain management support for the startup. Startups should not overlook the fact that they often have to give in information, control and participation rights with all the money that they get because of the investment. In addition, investors want to exit the startup at some point, so that there is high pressure on the growth rate and the overall performance of the startup and the founders.

3. Business Angels

Business angels are most of the time wealthy entrepreneurs/ individuals who participate in startups by acquiring company shares with their own capital. Business angels are usually ready to invest in a startup early on for the purpose of developing an innovative business model. In addition, they often have in-depth technical and organizational know-how, have a dense network of contacts and give startups targeted access to these resources. So they help with their experience and their network and see themselves as an ideal “development workers” for a startup. However, it should not be overlooked that business angels only very rarely “advertise” their financial capabilities or their very existence. That means you first have to find the suitable business angels. In addition, the investments of business angels are usually not very large — this form of financing generally happens in the initial phase of a startup.

4. Crowd funding

This type of financing usually refers to two types: crowd funding and crowd investing. Crowd funding is about collecting money for certain products, through platforms like Indiegogo or Kickstarter, in a predictable, limited time. The first production can thus be financed by a mass of small investors, the “crowd”. Crowd funding helps a startup to get money, awareness for its product (by presenting the product on the platform) and access to early adopter. In crowd investing, a startup receives capital, often in the form of loans, from many small investors, regardless of an already existing product. However, both forms of financing have disadvantages in follow-up financing, because now you have to deal with the large number of small investors. Furthermore, the question of meaningful exit arises because of the large number of investors.

5. Incubators and accelerators

Incubators or accelerators provide capital, but also support startups in other ways. In addition to capital (usually in the form of venture capital), an incubator usually provides an office infrastructure and other premises to a startup. In addition, it often provides advice and helps analyze and develop the business idea. Accelerator programs, on the other hand, are offered by a variety of organizations, including universities, venture capital firms, and industrial or financial companies. The startup will be provided with a mentor and the investing company will acquire shares in the startup in return. The question that a startup always has to face in such support programs is what the support is really worth. Ultimately, such programs are about contacts, networking and exploiting potential. If an incubator or accelerator can not provide that, then participating in such a program can be a waste of time.

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I am the co-founder of “Gründen@Würzburg”, the startup initiative of the German city of Würzburg. I had the honor to be the President of the G20 Young Entrepreneurs´ Alliance (YEA) Germany and the Chairman of the Steering Committee of the G20 YEA, an organisation that is the voice of more than 500.000 young entrepreneurs in the G20 countries (www.g20yea.com) .

A corporate lawyer by profession and equipped with my own law firm, I advises German and international clients (who want to do business in Germany) in corporate and commercial legal matters. By invitation of the European Commission, I have the pleasure to participant every year in the annual SME Assembly, the most important event for small and medium-size enterprizes. Additionally, I am a member of the B20 Task Forces and was from 2014 to 2017 the General Legal Counsel and also a member of the national board of JCI Germany (WJD — Wirtschaftsjunioren Deutschland), the biggest organization for young leaders and entrepreneurs in Germany. Last but not least I am one of the ambassadors for the “Großer Preis des Mittelstands”, the biggest and most prominent award for companies of the German Mittelstand.

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Carsten Lexa

Former Chairman G20 Young Entrepreneurs' Alliance (YEA), Co-founder startup initiative “Gründen@Würzburg”, Startup Investor, Commercial Law Firm Owner