more than capital Archive



August 2013



VCs vs. Angel

Written by , Posted in Finanzierung

Venture CapitalRecently, there have been two interesting blog posts that once again highlight the ambivalence between choosing either a VC or private/business angel investor. One very entertaining rant(!) from Paul Jozefak (Liquid Labs) that focuses on the „more than money“ promise each VC makes. He has a very clear opinion what VCs really provide and how their „advertising talk“ should be evaluated by future entrepreneurs. (LINK) „Enough with the Kool-Aid though….without your money most entrepreneurs wouldn’t really care much about you. It’s OK, you still have your triathlon, cycling or foodie friends.“!

Protonet on the other hand has chosen to ignore higher valuations and instead go with angel investors. More about their rational here: (LINK). Interestingly enough they left money on the table in order to go with business angels among other reasons due to the easier negotiations and less tight up management time. This is often an overlooked point – VCs are experts when it comes to negotiating deals (given that aside from trying to get a proprietary deal flow that is their only other expertise ;)). If you negotiate with experts you have to take into account that these negotiations will be very drawn out. Your starting point will most likely be documents drafted by a VC who has written many, many preferable treatment clauses in the documents before negotiations have even started. So time and complexity of negotiations is an important consideration beside the price tag.

Does that mean you should leave VC cash on the table and always go with angels? Probably not … this approach will only work for smaller financing rounds – angels will bottom out if you are looking for 1m+ x – or you have to take so many angels on board that it becomes annoying to keep all of them in the loop. They will also have a very limited ability to go for another round or to provide additional capital on short notice.

So chose carefully when you are planning to raise additional funds. Make sure you understand the major pros and cons between investors and try to determine what your long-term strategy looks like. Are you going to raise more funds down the road? Do you need certain individuals in order to grow your business? Will VC connections support your business right now? … … lots of thinks to ask yourself and unfortunately this is highly subjective and there is no clear right or wrong here.



Juli 2013



Startup valuation…

Written by , Posted in Finanzierung

… remains a mystery. There is very little data and often very differing views on future start-up developments and valuations between entrepreneurs (IPO here we come), investors (hopeful but very cautious) and parents (you are doomed). Here comes a very good summary and an even prettier graphic from Anna Vital on Funders and Founders! 







April 2013



What to do with all this liquidity…?

Written by , Posted in Strategie

Encouraged by Alexander Graf and his critical analysis of the current digital environment I asked myself why so many irrational business seem to get an almost unlimited amount of funding. In Germany there is always Zalando as a great example of this trend. The business is so far not profitable and investments that by now are topping over a billion Euros will never be recovered but international money is being thrown at Rocket Internet with an ever increasing speed. Its business model is not closely examined and investors push new capital into the firm without even asking some of the most basic due diligence questions. Is it really a plan to buy up the fashion market and pray that your proprietary brands and size will eventually lead you to break even? How are logistics organized behind the shiny technology and TV commercials?  Why is there such an irrational rush to throw more money at these kind of businesses? Since we are now starting to talk about investments going into the billions I am going to take a macro economic perspective to create a possible explanation.

Due to the current monetary crisis money has been pumped into our economic environment – if printing presses would still be responsible for monetary supply we would be running out of ink.

Eurozone M3


As you can see from the graph above monetary supply has increased substantially. In Europe it is a fairly even growth story but it becomes even more drastic if you look at monetary supply expansion in the United States.



What are investor to do with all this capital that has been pumped into our economy? There is no substantial growth in the „real“ economic output within the developed word – in fact there is a decline based on the recession the European Economic Area and the United States are currently going through. In addition there is only so much capital that can be invested in „traditional“ economies in rapidly growing markets e.g. BRICS countries. On top of these factors investors are also scarred – the ongoing EURO crisis, horribel US economic data, emerging conflicts in the Middle East and Asia … all this has impacted the ability to invest large amounts of capital. Investors now have less opportunities and more importantly have come to terms with lower return expectations, while taking higher risks.

What does this mean for digital investments?

Based on the above described trends we will continue to see irrational capital allocation in digital growth projects such as Zalando. Investors will increasingly accept long-term returns that are barely above inflation just for a chance to allocate some of their access capital. It does not mean that it will become any easier to raise growth capital below EUR50 million but it is becoming easier to collect amounts above EUR250 millions for growth projects.

Entrepreneurs THINK BIG!

So in conclusion tech-savvy entrepreneurs: stop thinking about running a business on EUR10 million start to think how you could allocate EUR500 million!



März 2013



Conclusion: Venture Capital – does it still work?

Written by , Posted in Finanzierung

…finishing of my post series in regards to VC industry changes …

Will prices for start-ups significantly change?

In my opinion most start-ups will continue to raise the necessary funds in Germany. Firstly, venture capital never played a significant role here and secondly a large range of new capital sources have been developed over the last years. Corporate investors have become much more active and crowd funding offers a new way to raise initial proof of concept financing. Universities and government agencies have also been offering additional financing sources. So I believe that in terms of start-up financing there will not be a significant impact from the declining venture capital funding. Internationally, this will probably be a different story.

But what does it mean for valuations? Again I believe that most German start-ups would not have been sold/continued financing rounds to/with VC funds in any case. Trade exits are the normal route to go for start-ups here and most corporates are not only willing to invest in start-ups but have been allocating significant amounts of capital. In terms of pricing I also believe that Germany is looking at incredibly low valuations anyhow and that equity markets are not an exit route for start-ups due to depressed listing outlooks. Hopefully corporate capital availability will actually help to increase pricing levels here.

In my experience …

Overall, I believe that corporates will play a significantly larger role in the German start-up scene than VCs ever had, have and will. The OTTO Group alone has an early phase incubator (Liquid Labs, later stage incubator (Project A and a later stage VC funding partner (eVentures Most other large German corporates are following this trend and are establishing their own teams.

In addition, I am pretty sure that we will start to see an increasing number of more specialized incubators that offer additional guidance and support as well as follow-up funding through corporate buyers. Here an interesting trend from the US are specialized healthcare incubators like Rockhealth or Medstartr.

“Rockhealth is one of the growing incubators in the healthcare industry. They help teams with venture capital, advice and their network to find proper healthcare business models & help to scale them. The startup industry is just starting to innovate around healthcare and those incubators are likely to be in the centrum of this development.”

These significantly more specialized funds will take over start-up financing and provide industry trade buyers for growing start-ups. Entrepreneurs who are looking to grow their business should therefore forget about impressing VCs and start building their corporate contact network.



Januar 2013



Venture Capital – does it still work?

Written by , Posted in Finanzierung

Previously, venture capital as an asset class has been critically discussed by Jochen and Alex in their respective blogs and

Source: and

In his last blog Alex already hinted that I am working on a more detailed analysis of the subject. Why do I find this interesting? Well, after having worked in the PE and VC industry I always wondered how it would feel to change sides – become an entrepreneur and learn the nuts and bolts of daily operational challenges. It has been very interesting and I am tempted to claim that “professional” VCs who have been in banking or consulting all their lives and therefore represent the favorite MBA trained elite that joins VC/PE firms on a junior level – know next to nothing except how to draw pretty slides, talk in “investor” slang at fancy conferences and run after hypes like a crazy bunch of headless chickens. This is clearly an exaggerated view but overall the question remains if  venture capital is an asset class with a future. The question is, if the more experienced senior staff has the ability to find deals and make investments that are profitable. In addition, I am wondering if only a select few sometime „get lucky“ or if this is a sustainable industry with a risk/reward ration that should be attractive to investors.

In addition, Germany has seen a significant increase in venture capital through the Berlin „hype“. Now, with the entire industry under fire it becomes extremely interesting to see how the industry is going to develop. Even more importantly I am certain that these new analysis will have an impact on the rapidly developing European start-up environment.

Based on a range of studies it has become clear that the venture capital industry in general simply sucks at being investors and even more importantly sucks as an investment vehicle for their Limited Partners (“LPs”). Returns of venture capital as an asset class are simply not sufficient to continuously attract new capital.

How bad are returns?

The Kauffman Foundation, a highly reputable Limited Partner in many venture capital firms, has published the following facts based on their significant, long-standing venture capital investment history.

Only twenty of 100 venture funds generated returns that beat a public-market equivalent by more than 3 percent annually, and half of those began investing prior to 1995. 

The majority of funds—sixty-two out of 100—failed to exceed returns available from the public markets, after fees and carry were paid.

There is not consistent evidence of a J-curve in venture investing since 1997; the typical Kauffman Foundation venture fund reported peak internal rates of return (IRRs) and investment multiples early in  a  fund’s  life (while still in the typical sixty-month investment period), followed by serial fundraising in month twenty-seven.

Only four of thirty venture capital funds with committed capital of more than $400 million delivered returns better than those available from a publicly traded small cap common stock index.

Of eighty-eight venture funds in our sample, sixty-six failed to deliver expected venture rates of return in the first twenty-seven months (prior to serial fundraises). The cumulative effect of fees, carry, and the uneven nature of venture investing ultimately left us with sixty-nine funds (78 percent) that did not achieve returns sufficient to reward us for patient, expensive, long- term investing.”


There are also other articles and reports that are based on the Kauffmann analysis and the inability of venture firms to raise new funds. Limited Partners have finally woken up to the reality that blindly investing in larger and larger venture capital funds no longer makes sense. Why is that? As Fred Wilson states in a recent MIT technology review interview:

“Because the returns haven’t been very good in the venture capital industry for a long time. I think if you talk to the investors in venture capital partnerships, they’ll tell you that they’re very much on the fence on venture capital, and if venture capital continues to put up mediocre returns, they’re not going to stick with it forever.”


At the moment Berlin delivers a wonderful live case study to prove my point. The current hype, number of horrible investments and general herd behavior of investors in Europe’s new venture capital “capital”. Where are the actuals businesses that are supposed to generate lasting returns in the current “hype-cycle”? Where are the returns, exists or just simply lasting value creation? A small elite group of investors such as the Samwer Brothers are highly successful but from my impression the overall industry does not generate lasting value.

The Kauffmann report goes on to argue that actually LPs should re-evaluate their investment behavior and focus on other key value drivers within the VC industry.

  • “Invest in VC funds of less than $400 million with a history of consistently high public market equivalent (PME) performance, and in which GPs commit at least 5 percent of capital;
  • Invest directly in a small portfolio of new companies, without being saddled by high fees and carry;
    • Co-invest in later-round deals side-by-side with seasoned investors;
    • Move a portion of capital invested in VC into the public markets. There are not
enough strong VC investors with above-market returns to absorb even our limited investment capital.”

The Kauffmann report also has an interesting title:

“MET  THE  ENEMY…  AND  HE  IS  US” – Lessons  from  Twenty  Years  of  the  Kauffman  Foundation’s   Investments in Venture Capital Funds
and The Triumph of Hope over Experience“.

They consider the problem the be the LPs – they need to change their asset allocation in order to substantially alter industry behavior and subsequently the return rate for the industry as a whole.

The previously listed investment recommendations are only one side of the equation. I think that there is a general consensus that due to the lack of returns and the issues outlined by the Kauffmann Foundation the VC industry will change.

Therefore, there are a lot of questions that remain:

What are the implications for start-ups? What consequences does this bring for VC funds, which have fully invested their current capital? Will prices for start-ups significantly change?



September 2012



Preemptive obedience … or focusing on the right thing at the right time…

Written by , Posted in Allgemein

I just had a very interesting discussion with one of our CEOs. In essence it involved a heated debate on what to do with substantial accumulated funds of one of our portfolio businesses. Invest, save or distribute to shareholders – for me it was clear that a start-up needs to heavily invest if it sees an opportunity. Screw security, savings or distribution of returns! This often means taking on a substantial amount of risk and not focusing on those things that would be dear to a prudent eCFO. The CEO was totally surprised to hear that from me and said “that goes against everything you told us before. You made us focus on liquidity, told us we needed 3 month working capital in the bank and were not allowed to spend any money on stuff you considered not absolutely essential.”

This clearly showed me the danger of over emphasizing certain points.

Just because I firmly believe that liquidity is the one and only important measure for a start-up does not mean that once the business is generating cash it should not be re-invested. It also does not mean that I would suggest that savings and reserves should always be the right way to go. Each measure ALWAYS needs to be adopted to the environment it is applied to! Risks need to be taken once it has been sufficiently analyzed and understood – start-ups depend on the risk taking ability of its management.

For me this is an important lesson that as an eCFO you have to continuously further the education and situational awareness of your team and the people you work with. Never assume that people will understand that each measure is only applied for a certain period of a business lifecycle. It also means that I need to improve my communication in regards to a healthy balance between risky and risk adverse behavior.



Juli 2012



FolienKnecht – a case study (b)

Written by , Posted in Strategie

Business model testing (Is it profitable? Is it scalable?)

Regular checks are important for a start-up. Have your previously set goals been reached and if so, can the business be scaled further? We usually measure the scalability by starting with relatively small trial cases that cover a broad range of marketing measures. Can we generate sales through Google Adwords, mailings, e-mail marketing, tele-marketing, direct marketing events or any other method? If there are a couple of measures that allow us to generate sales with a positive return e.g. if we spend 50 cents we can generate 51 cents in revenue we know that this potentially could allow the business to scale. Once we have found a method that seems to work, we scale the test case – if we can generate EUR10,000 in revenue by spending EUR500 through adwords, could we also generate revenue of EUR100,000? As an eCFO you need to push this test case as quickly as possible to make sure that the business model actually is sustainable and has significant revenue potential. If not – kill it quickly.

eCFO Tips: Make sure that management teams can differentiate between expenses and investments. In our company everybody gets a VOIP phone installed on their computer and uses a headset for calls. We do not have actual phones anymore. Nevertheless, the FolienKnecht team requested to spend EUR40 for an actual phone – it took a long discussion for them to convince me that this was a necessary expense and approval took a while. At the same time I suggested that they should get together with the city of Hamburg and sponsor a networking event. Sponsoring fees here were a small 4 digit amount and they asked why I did not have a problem with such a comparatively large amount, versus all the hassle for the EUR40 phone. The answer is easy – for a start-up it is essential to spend money on the RIGHT things not on those that are nice to have. As an eCFO it is your responsibility to ensure that this principal is actually enforced and that every expenditure is measured.

Event overview!

Investments and financing

I admit – this is a special case since FolienKnecht is a services business, a powerpoint designer, which can grow through its own cash flow generation ability. Therefore, I just needed to make sure that I fully understood the cost structure and what was needed to bring the business to break even cash flow generation without raising significant capital. As with most agencies it is possible to grow with this easy formula: “one employee needs to generate enough cash to pay the salary of two, two for four, four for eight and soon growth is possible”. In addition, your cost structure will mostly consist of salaries and some marketing investment but both cost items should quickly generate revenue. What is more important is that you create structures that are highly efficient and streamlined for cash generation.

For any other type of venture that require significant start-up capital I would suggest that you calculate your financial needs, then add 30% of that total to your numbers and you are good to go. Once you have determined your financial needs, raise a little bit of capital yourself and build a prototype. Investors are much more likely to give you money (even for a higher valuation) if you can show them a working prototype vs. a slide presentation with nice ideas on it.

Overall, I hope that these posts provided some operational examples of how to implement the measures I described in previous posts. As always I am looking forward to receive your feedback and comments!



Juli 2012



FolienKnecht – a case study (a)

Written by , Posted in Strategie

Enough of all the theoretical posts! Here is a more interesting, operationally focused case study. I think that my previous posts have theoretically highlighted various aspects of being an eCFO but what does it mean for operational reality? In order to further highlight this I was able to get permission from one of our venture teams to write about them in this post.

Here a quick description of the business model:

FolienKnecht (German for “PowerPoint slide servant”) is focused on providing high quality outsourcing services. Its first line of business is creating, designing, and improving PowerPoint presentations. (; Spanish:

Its second business line has recently gone online with a video creation/design offering ( and it also provides a range of other outsourcing services through The business was initially tested through an intern and eventually bringing it into fully operational mode through incubating it within our company (

Timeline of development

FolienKnecht was incubated in the beginning of January 2012. We found a very capable management team consisting of two guys. One is the intern who developed the project and the other is an experienced entrepreneur. Both were willing to take this project forward with the eventual goal of founding a company and creating a business outsourcing company with multiple revenue lines from various business services.

Operationally, they received support from our incubation structure but this case study will focus specifically on the financial aspects. If you are interested to read a case study from another perspective you can find additional insights (sorry, in German only) here:

eCFO tasks for a new venture

As the eCFO in our holding company it was my responsibility to take care of the financial aspects. In this role I helped the management team to develop a strong financial understanding to ensure that the company eventually developed into a financially strong independent entity.


Within the team responsibility was shared between the two founders. In start-ups everybody does a little bit of everything to make sure that things get done quickly. This is necessary and a good starting point but fairly quickly set roles should be developed. I asked the founding team to provide only one contact point for all financial questions, analysis, and data points.


Our incubation services take care of all central basic services. This ranges from office space, to laptops, water/lots and lots of coffee and other basic things you need to run a business. In addition, we take care of central services such as accounting, HR, recruitment, and legal consultation. These services are initially provided free of charge to speed up the incubation process. However, it is important to make sure that the entrepreneurs are aware of the actual (expensive) services the venture incurs. The company therefore needs to track these expenses and needs to start to implement liquidity controls, budgets and financial planning. This is best done through an Excel spreadsheet that mirrors an actual P&L statement.


Initially, we determined the basic costs incurred by running FolienKnecht and set clearly defined goals we needed to reach in order to move all activities from our incubator into the new entity. Spreadsheets and preparation of financials are also important controlling functions. Here it was important that once a clear goal had been defined, the necessary measures were put into place to ensure that it could be tested on a monthly basis whether or not the venture was successful. We came up with a simple P&L statement that showed expenses, income, and sales funnel in an excel spreadsheet. This is a quick, slightly dirty, way of preparing the necessary financial information. In addition, we provided access to our billing software so that every bill can be generated by the management team but, more importantly, so that they can understand payment cycles and all connected liquidity concerns. If you are incubating a business within an already existing structure, you need to make sure that from the get-go the management team feels the same constrictions and problems it would feel as an independent business.

eCFO Tips: Especially in a start-up environment do not get bogged down in the details. If you are looking to establish financial goals do not say EUR9,287 because your business plan spits out that number – instead just define easy to remember goals e.g. we need EUR10,000 revenue per month with at least 30% EBIT. Do that for 3 months in a row and this business starts to be viable. This is an easy rule for not only you to remember, but it also sets a financial target the management team can work towards.

To be continued in the next post …


Here you can find an example of their work:

yH5BAEAAAAALAAAAAABAAEAAAIBRAA7 - FolienKnecht – a case study (a)
View more presentations from FolienKnecht



Juli 2012





März 2012



Financing or getting married?

Written by , Posted in Finanzierung

Setting the tone…

Financing is a fundamental decision for each entrepreneur. Unfortunately, there is no perfect financing partner and each financing process should be highly tailored towards an entrepreneur’s individual needs.

I often compare financing to marriage – as crazy as it might sound a financing process has many comparable steps. From the initial flirtatious phase where a person goes out and looks for a date to eventually marry–an entrepreneur’s initial hunt for an investor to the final signing of documents in front of a notary has a lot of similarities. Whether you see your perfect partner on a dance floor or see a famous venture capitalist walking around at a networking event – I promise your heart will start to beat faster. Once a relationship becomes serious and an engagement looms on the horizon an entrepreneur will face a lot of due diligence questions – similar to going for your first trip with the future in-laws. Marriage is just the same – some will be great, long-lasting and highly profitable for both sides, while others will end in a quick and maybe even messy divorce where both sides wish they would have paid more attention to the wedding contract. Most importantly there are a couple of comparable lessons entrepreneurs should take from marriage:

  1. Choose your partner wisely – you might be together for a long time
  2. Make sure you can live with each other BEFORE you get married – after you signed the contract it is much harder to get out
  3. Make sure you have a complementary skillset – as with most marriages your partner will help to mitigate your weaknesses with his strengths and vice versa
  4. A good relationship requires hard work, dedication and trust – both sides need to work on keeping the relationship happy

Before going into the more technical aspects I hope that I set the tone for financing and the importance it will have for your venture – it can be a game-changing experience and that is how seriously you should take your financing partner selection process.

This post will now highlight different funding options for entrepreneurs and their new ventures. Aside from all the operational issues the question of a) how much money do I need and b) who should I get it from – are often the most difficult choices an entrepreneur has to face.

In order to define some variables for the case studies below I will show my view of financing stages – there is a lot of debate and options on what stage is what so here are the definitions I found easiest to work with:

Pre-seed:        €0 – €50.000

Seed:               €50.000 – €250.000

First round:    €250.001+

Pre-seed should always be used to get a small test case going that outlines the feasibility of the project and in my opinion this should be 100% financed by the entrepreneur and her team. If an entrepreneur is not able to either raise that amount of capital from FFF (friends, family and fools) she should reconsider if starting a venture is the right thing to do.

eCFO Tips: Especially online focused ventures can easily create a fully functional click dummy, wireframes and a strong web presence to convince investors with more than just nice looking slides. This will help you to move your valuation discussion to a whole new level.

It becomes trickier in the seed financing round. Here the amounts of money needed are more substantial and can often not be contributed by only the entrepreneur or FFF. I would advice to look for a partner in this stage who can contribute more than just capital. This is probably one of the most overused and equally misunderstood statements ever used. 

eCFO side note: my personal favorite and number one overused phrase is: teams – people are everything and I only invest in A team – especially if it comes from a VC or incubator team that replaces its entrepreneurs after every little bump in the road and does not care at all about the entrepreneur who put his blood, sweat and fortune into building a high risk venture. Make sure you check on an investor’s reputation and how past teams of entrepreneurs have been treated.

more than capital 

More than capital for me means either excellent investor contacts that lead to initial sales, technology knowledge or direct hires. It is often difficult to fully understand how good these contacts are prior to actually using them. Here I would advise the entrepreneur to call at least three different references who can talk about their relationship and experience with the investor. Often entrepreneurs think that ONLY the investor can undertake an in-depth due diligence – this is not true. The entrepreneur should also fully understand whom she is taking on board as an investor and should make sure that her due diligence is thorough.

…sources of capital…

In terms of capital sources I would like to provide three sources of capital that are build on my prior experience and the experience of many other entrepreneurs I have talked to over the years.

Venture Capital

Pros: Venture capital from a professional VC firm or investor is a highly potent source of financing. A VC will, in most cases, have an excellent network and a strong understanding of financing processes. He (and most often it will be a he) is also a specialist in legal and financing documentation. The can provide strategic advice and will have strong market knowledge. In addition, most VCs will have access to either additional capital from their fund or alternatively have a network of financing or exit partners that ensure future capital when an entrepreneur needs to raise more capital.

Cons: For an entrepreneur there is a dark side to all of the previously mentioned positives. VCs will have an excellent network but make sure that the network is right for you – just knowing a lot of other VCs and entrepreneurs might not be what you need. Strong contacts to marketing partners or future clients might be much more important. The strong experience in financing processes and legal documentation is the most frequently used weapon against an entrepreneur. Always remember it is a VC’s JOB DESCRIPTION to write financing documentation that will give him every possible advantage. There is no easier way to completely lose control of your venture than to sign a document drafted by a VC.  A VC will always be better in contracts than an entrepreneur is – remember an entrepreneur is generally operationally focused. A network for follow-up financing and exit partners is exactly that – a quick way to EXIT the investment and get a return. A VC will always want to exit your business in order to get returns. Remember by entering into this financing relationship you are also defining a sale of our business.

eCFO Tips: ALWAYS make sure you understand what drives a financing partner. The average VC will have a three year fund raising cycle that means they have to go out and raise / pitch for new capital one year after closing their current fund. The VC world has become a significantly tougher place – many VCs failed to raise capital during the financial crisis. If an action that puts your venture in jeopardy but will help their fund raising comes up it will be clear what they will do. Be prepared.

They will also have huge return expectations from their capital providers and can only use very limited leverage– so an exit is the ONLY way for them to be successful. Keep that in mind if they ever tell you that they will not push you towards an exit.

Conclusion: VCs have a lot of money available and are highly professional, agile and focused. They will be exit-driven and push you forward as long as you generate returns. They are only in it for the money – never forget that and use it to your advantage.

Joint Venture / Strategic Partner

Pros: A joint venture with a strategic partner can be a great thing. A strategic partner will have deep operational experience and in most cases significant non-financial assets. Aside from capital this partner will often offer access to clients, knowledge and team members that a budding entrepreneur could never source independently. In addition, it will be a strong financing partner who is not discouraged by small bumps in the road and is in it for the long-term.  An entrepreneur can also be sure that the right exit partner has already been found. Most strategic investors will add a call-option to the financing document that allows 100% purchase of the business in the future.

eCFO Tips: Call-options are funny things – you are giving away your company at some point in the future without having any indication, beyond wild hopes and dreams , of its value at the time of exit. Remember that in general there are some things are just as true for a strategic partner in the future as in the present– they will still have more lawyers than you do, they will hopefully still have a substantial strategic interest in your company and they will have cash.

So try to lock in a valuation method now that rewards you for parameters you know your business can potentially reach. As an example: don’t put an EBIT based valuation into the contracts if you know that you won’t reach break even for a while or agree too easily to a “at fair market” valuation. Especially with fair market value valuations it will be hard to argue for a correct market value if this asset makes only strategic sense to your individual investor and when you have no realistic way of shopping / showing your company around to other investors when you are trying to exit. Even if you put in the popular phrase that allows for an evaluation of an independent auditor remember that this auditor will most likely be working for your strategic investor and that they will always be a more interested to work for the strategic in the future than you – magically that can influence valuations!

Cons: Again, what is true for VCs is true here as well. Most of the pros of a strategic investor can be turned around into negatives. Most of all, be prepared to be in it for the long-term – that is true for EVERY SINGLE ASPECT of this relationship. In the beginning be aware that most strategic partners will have decision making processes that make a snail seem to move at rocket speed. From the first pitch to actual investment it can easily take 9-12 months.

In general, strategic partners will also be huge organizations – getting to the right people at the right point of time and piercing through inter-corporate politics can keep you quite busy. In a start-up there is no time for politics and things that move you ahead in large corporations. Things like number of employees (overblown teams), budget (spending & wasting) ability and political connections (sucking up) will actually be disadvantageous for any start-up.

You will also not be able to move in any direction you want. Certain clients, business methods and entrepreneurial shortcuts will be off the table. The strategic partner will also be sure to keep the upper hand in any contract and it will sometimes be hard to show that this is a joint venture between equals.

Conclusion: A strategic partner can unlock assets that you couldn’t buy with money – contacts and operation experience can be right at your fingertips. It will be generally a lot nicer relationship than with your average, cut-throat financial investor but you will have to deal with a lot more politics, size and slow- moving operational structures.


Pros: For me this remains the true key entrepreneurial discipline. There is no better feeling than growing a company based on the strength of your team and your personal efforts. Almost nothing feels better than looking at your financials and generating substantial returns and knowing that all it took was your hard work and not somebody’s capital. You did not buy your success – you truly built it.

Aside from this motivational aspect it also means that when it comes to making decisions you do not have to ask anyone else. Your team and you have full freedom to run the business. It also means that you can grow a business and maintain ownership of the business as long as you want. This is also true for all returns that your business generates.

As an entrepreneur this also prepares you for making hard and fast decisions. You do not have time for waste of capital, bad employees or unprofitable clients. You have to act quickly and decisively to stay alive since there will be no capital buffer to keep you going if you run out of cash.

Cons: Bootstrapping is hard, often prevents you from making necessary investments and always distracts from the operation side of your business. It is also only good for highly cash-generative business models such as services provider and agencies. The constant liquidity pressure will also shape you as an entrepreneur and make you hesitant to go on sometimes necessary spending sprees and/or investments.

It will put your team into a hard place that often requires to opt for short-term cash generative measures instead of focusing on long-term value creation.

Conclusion: Bootstrapping stands for freedom from external investors but puts severe operational restrictions on your business. It can only work for some business models and will make it almost impossible to quickly expand your business or to rapidly capture markets. For me this remains a key test of your entrepreneurial skills but most people will not be able to build a significant business without any external capital.

…and finally

In our business we have successfully raised capital and grown businesses using all three of the above mentioned financing methods.  That taught us that there is no perfect financing partner but depending on which venture you are trying to get funded one or the other will be a significantly better choice. Just make sure that from the get-go you understand your motivation and what motivates your financing partner. Any relationship then needs hard work, dedication and trust. Make sure that all three of these aspects are maintained throughout your financing partnership … come to that and going full circle from the beginning it might even help in private partnerships as well 🙂

Quick Disclaimer: I have only focused on equity capital. There is a lot to be said for alternative financing or debt financing. Stay tuned for a discussion of these topics at a later stage in this blog.