Starting a Business in Berlin

66 67 Starting a Business in Berlin A Beginner’s Guide Private equity Private equity is an appropriate financing option for techno- logy-oriented or innovative, fast-growing start-ups. In such cases, the risk of default is often either difficult to estimate or else clearly going to be high, with a particularly long time required to get to market. As a result, credit financing from financial institutions often fails to meet the risk management requirements. Private equity increases the equity of a compa- ny through external financing, provided by business angels, venture capital, private equity, or accelerators/incubators. Venture capital for early/growth financing Equity financing in the early/growth stages of innovative start-ups is frequently referred to as venture capital. Various equity options can come into play here depending on the investment phase and venture, not to mention the company profile. The terms and conditions of the investment form are determined by contract on an individual basis. The following investment options are commonly found in practice: ls Direct (open) investment This is where the external equity provider participates in the company’s share capital (GmbH) or capital stock (AG) and thus becomes a co-shareholder. The investor general- ly sees a return at the end of the investment phase (after 3 to 7 years) upon selling its share (exit). As a result of having shares in the company, investors are also granted co-determination rights. FINANCING WITH YOUR OWN RESOURCES AND INITIAL TAKINGS When looking to secure your initial funds, you should start by checking whether you might have access to finance that does not rely on third-party capital. Equity – financing with your own resources If you have savings that you use while starting up your business, these take on an essential role as equity in your company. On the one hand, you are in a flexible position with sufficient equity, making you ideally equipped for dealing with liquidity shortfalls and allowing you, for example, to off- set unforeseen fluctuations, pre-finance orders and respond to changing market requirements. On the other hand, equity puts you in a better negotiating position with banks and sa- vings banks (Sparkassen) whilst also improving your rating, which can result in lower interest rates. Generally speaking, you should be able to cover 15 to 20 per cent of your capital requirements with equity. Bootstrapping – financing with initial takings Bootstrapping is the ideal type of financing for you if you can accommodate your company set-up and strategy within a very tight budget and with minimal resources. By avoiding expenditures whilst at the same time increasing revenues, bootstrapping only manages to keep your company afloat with its cash flow. Bootstrapping is primarily advisable for setting up a company that only requires a little starting capi- tal – also known as a low-budget model. CHAPTER 6