13

Chapters

20

Case Studies

300

Pages

15

Contributors

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Highlights

This book reveals:

  • Where to to find investors and the best approaches to win their support
  • What investors are really looking for but won’t tell you
  • How to persuade banks, business angels, VCs and public funders
  • Insider tips for compiling material that satisfies investors
  • Little-known strategies that will boost your success

Page 3

Introduction 6
Chapter 1 – Do you really need external funding? 8
Chapter 2 – Your startup’s risk/reward profile 15
Chapter 3 – Who invests in what and when 25
Chapter 4 – Why can’t you find an investor? 34
Chapter 5 – Co-founders are your first investors 45
Chapter 6 – Friends and family financing 63
Chapter 7 – Startup Accelerators 75
Chapter 8 – Business Angels 94
Chapter 9 – Venture Capital 112
Chapter 10 – Public Funding 148
Chapter 11 – Banks 167
Chapter 12 – How to contact investors 173
Chapter 13 – Guide to investor material 186
Wrap up – What next? 225
Select Bibliography 227

Page 3

Introduction 6
Chapter 1 – Do you really need external funding? 8
Chapter 2 – Your startup’s risk/reward profile 15
Chapter 3 – Who invests in what and when 25
Chapter 4 – Why can’t you find an investor? 34
Chapter 5 – Co-founders are your first investors 45
Chapter 6 – Friends and family financing 63
Chapter 7 – Startup Accelerators 75
Chapter 8 – Business Angels 94
Chapter 9 – Venture Capital 112
Chapter 10 – Public Funding 148
Chapter 11 – Banks 167
Chapter 12 – How to contact investors 173
Chapter 13 – Guide to investor material 186
Wrap up – What next? 225
Select Bibliography 227

Page 63

Chapter 6 – Friends and family financing

What can you do when you realise that even with a great team on board, none of the professional investors think your project is interesting or mature enough, and you’re running out of cash so bootstrapping isn’t an option anymore? My bet is that you’ll do what most other entrepreneurs do in that situation: turn to your friends and family for financing.

When friends and family invest in startups it is sometimes referred to as the “three Fs investing”: friends, family and fools. Friends and family are often the first investors in a startup, and they are usually the least qualified to make decisions on the inherent risk and reward. They are the first of all non-professional investors and they make their investing decision because they know you and trust you – not because of your business.

To avoid becoming the fool or risk taking advantage of friends and family and ruining relationships forever, read this chapter carefully.

———————————————–

Case: Funding from friends and family – the Peecho story

Peecho is the previously mentioned print-on-demand platform for magazines and books.

The company got its initial traction via bootstrapping, but eventually needed additional funding. After failing to raise venture capital funding, Peecho decided that talking to venture firms wasn’t leading anywhere. They decided to try a completely different approach: raising the money from their friends and network.

We made a list of people that we knew; old bosses, people who were well known in the startup scene, successful entrepreneurs that we knew etc. We made the list and said: ‘Are they useful, can they spend some money and do we like them?’ Then we filtered them, mainly on the ‘do-we-like-them’ question, and started calling them from the top. We said: ‘We only have a product – we have no customers, no revenue. We are going to sell part of our shares right now and we have chosen you as one of the selected few. You can now …

Page 75

Chapter 7 – Startup Accelerators

Perhaps a startup accelerator is the tool you need to advance your startup to the point where you’re able to attract other kinds of funding. In this chapter you will learn about the benefits and downsides of being accepted into an accelerator programme and what you should be aware of before applying.

What is a startup accelerator?

Accelerator programmes are essentially startup factories. They speed up the process of creating successful startups.

An accelerator is typically a three- to six-month programme involving intensive, on-site training and mentoring of the startups. As a startup, you are accepted into a cohort – much like being accepted into a business school – where you work with all the other startups that have been accepted and attend workshops on how to build your business as well as receiving mentoring from experienced entrepreneurs. You are working towards what is often called a demo day when a lot of influential people, VCs, investors and business angels will be present and each startup will showcase their project and how far along they are in the process.

Accelerators vs. incubators

You may wonder what the difference is between an accelerator and incubator – and for good reason because the differences aren’t clear cut. Whilst accelerators are relatively new, incubators have been around for a while. Normally, you don’t go to an incubator for just three to six months; it’s essentially your workplace. Incubators build services on top of their office spaces to add value for the startups, which can include mentoring and workshops. But an incubator is typically less intensive, longer term, and much more focused on creating a good office environment than an accelerator. It helps you connect with other startups, but is still just an office with added benefits.

Page 94

Chapter 8 – Business Angels

Who will invest in your company after you’ve bootstrapped? Many founders conclude that business angels (private investors who invest their own money in startups) are next. This is how business angels differ from VC funds who manage and invest other people’s money. In this chapter we will investigate the best ways to catch a business angel and how to avoid the most common mistakes entrepreneurs make when looking for business angel investments in their company.

When do business angels invest?

Business angels are typically the first investors in startups and invest much earlier than venture capitalists. Unlike with venture capitalists, you don’t need massive existing revenue or millions of users for getting a business angel interested in your company. However, most business angels don’t invest when you only have a business idea in your head or down on paper in a business plan. They want you to have taken the first steps.

This is especially true for projects with a high degree of technology risk where you are still in the research and development phase. In many cases, the business angel doesn’t have expert knowledge about your technology and will have a hard time evaluating risks. Therefore, many angels prefer not to invest when you are too far away from the market (typically more than a few months before launch) and haven’t demonstrated that your technology actually works.

———————————————–

Case study: Franco Gianera – entrepreneur turned business angel

A former business consultant for Andersen, Franco Gianera left a CIO position at Adecco to follow his entrepreneurial dreams by co-founding Buy Vip (the Spanish premium clothing retailer bought by Amazon for €70 million in 2010). Today Franco works as an angel investor with investment into a variety of startups (for example, Smarto, Spotlime and Marchetti Atelier.) He explains: …

Page 112

Chapter 9 – Venture Capital

In this chapter you’ll learn why venture capitalists are the biggest risk takers and how they can afford to take those risks – as well as why venture capitalists invest much later than most entrepreneurs think. And why, among all the companies in the world, venture capitalists are looking for, meaning most startups therefore aren’t suitable for venture capital. Most early stage startups should stop wasting their time chasing venture capital and focus on getting their startup off the ground with bootstrapping and funding from other sources.

What is a VC fund?

A venture capital (VC) fund is an investment vehicle, typically created by a small group of people called the general partners. These general partners might be serial entrepreneurs who have some money that they want to invest in startups. However, they don’t own the majority share of the fund; they have investors too.

Here is how VCs usually work: The (typically) three to five general partners come together to invest in a number of startups. They personally have €5 million to invest, but would really like to invest €100 million, so they go out to their investors and find the remaining €95 million. These millions are actually invested by people like you and me through the pension funds we contribute to each month. Pension funds don’t invest in startups directly, they do so via VC funds.

Pension funds are so-called limited partners or sleeping partners in VC funds. They provide around ninety-five to ninety-nine per cent of the capital, but are not involved in the day-to-day operations of the venture fund, which is handled entirely by the general partners who are responsible for the investment portfolio for each fund.

Page 186

Chapter 13 – Guide to investor material

Getting an investor is a process. In this chapter we will look at the different types of material you need to produce for each step in the funding process. What do you need to bring? What data/material is the investor expecting to see?

It’s similar to hunting for a new job. You have to find an open position, contact them, send the correct information, and present it to them. You might need to provide references or further information. Finally, you sign a contract.

Getting financing is no different. Your goal with the first application is (as with your first contact with a potential employer) is not to get the job, it’s to get to the next step in the process – the interview. You need different material for different steps.

Step 1 – The first contact

The best way for you is to get introduced to a potential investor is through a mutual contact. But even then, you shouldn’t wait for the potential investor to get back to you. You need to take the first step.

This first step is typically via phone or email. The goal is to generate interest: an invitation to drop by for a presentation or a request for more information. You want the investor to be so interested in your proposal that they select you as one of the proposals they will spend more time evaluating. Question is, how do you generate that interest?

I propose that your email (or pitch over the phone) contains the following three elements:

  • Firstly, make it clear why your case is interesting for them. Quickly state that it’s something that fits with what they invest in, that it is at the right stage for them, and that the industry risk/reward position is similar to what they’re looking for. To do this effectively you need to do some desk research before contacting the investor, to find out what they are interested in.

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Testimonials

Shomit Ghose, Managing Director & Partner at Onset Ventures

Shomit Ghose, Managing Director & Partner at Onset Ventures

"Getting a startup actually started, funded, and then operational is not for the faint-of-heart. It’s a complex and generally daunting process. Nicolaj’s “The Startup Funding Book” is your go-to how-to manual for navigating your path in building a startup you can be proud of. As an entrepreneur myself, I can say the book needs to be on your list of required reading!"

Dan Eisenhardt, co-founder of Recon Instruments

"Nicolaj was instrumental in getting Recon Instruments off the ground. As one of its first shareholders, he led the first angel round and subsequently helped raise millions of dollars from angel investors around the world, using his network and expertise to identify people that would invest in what seemed at the time to be a crazy idea. His personal drive and ability to simplify and drive clarity was hugely beneficial in navigating the sometimes complex process of early stage fund raising. I strongly urge entrepreneurs to follow his pragmatic advice in this book. It will get you results."

Dan Eisenhardt, co-founder of Recon Instruments
Philip Anderson, INSEAD Professor of Entrepreneurship

Philip Anderson, INSEAD Professor of Entrepreneurship

"Nicolaj Nielsen shows you how to analyse what funding your venture needs and assesses the pros and cons of every major source. He then helps you reverse-engineer the way investors will think about financing your business and teaches you how to align your pitch with their mindsets. The section on how to find and work with a co-founder is worth the price of the book alone. Read this book before you start your business — its practical, intelligent advice could save you many months and missteps."

Lars Tvede, Investor, Author and Serial Entrepreneur

"When I read business books, I normally set out to highlight everything I find important in it with a yellow marker. I drop some books half way because I have marked almost nothing. I read others to the end because I frequently find important passages to mark up. And then occasionally I read books where I have to stop using the marker, since I would otherwise need to paint most of the book yellow. Nicolaj`s book falls in this third category. It is extremely concise and practical, and I would highly recommend it to anyone looking to raise capital for a start-up company."

Lars Tvede, Investor, Author and Serial Entrepreneur

Startup Funding Blog

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About the Author

Nicolaj Højer Nielsen


Nicolaj Højer Nielsen is a startup funding expert. He has secured finance for his own startups from friends and family, business angels, VCs and public funders.


As a business angel, he enjoys bouncing ideas with fellow entrepreneurs, and increasing new ventures' prospects of success. His speciality is discovering IT startups with high potential. He has reviewed thousands of opportunities and invested in many promising new enterprises.


Nikolaj earned his MBA from INSEAD in France and Singapore and an MSc in Marketing from Copenhagen Business School. He teaches entrepreneurship at Copenhagen Business School and coaches new entrepreneurs.