Public launch financing or professional investors?

Or why it's important to make the right choice from the start

The good news is, the start-up scene is gaining momentum again, and a spirit of optimism prevails. The bad news is, even high-potential start-ups are doomed after one or two years, even though they could have generated one to two million in sales, just because they get involved with the wrong financing structure! What lies in store for start-ups, and what should they consider?

Case study: In early 2007 a financing search team introduced its company to a well-known early-phase venture capital company – the idea, from the realm of computer games, was revolutionary and promised to turn a profit very quickly. There was nascent competition in the USA, but it could not fulfill key quality criteria. Upon closer examination, however, it looked as if the lead could not be maintained forever, and that "execution" was key, that is, targeted and pragmatic product development and a quick market launch, otherwise other technologies would establish themselves in this market. The venture capitalist recognized the opportunity, and after a first phase due diligence within a few weeks prepared a termsheet that would enable the company to concentrate fully on the market introduction and development until break-even, and consequently, until the next growth phase.

The founder, however, reckoned otherwise, going with public funding that yielded only ¼ of the capital that the private VC would have contributed and at a high price, but at least the valuation would increase from the outset. Yet a half a year later, the financing round with the public investor still had not been concluded, and the employee search was proving difficult because it was hard to attract the necessary highly qualified programmers – they didn't want to venture on an undertaking with a financing period of only six months. Today the CEO (that had been required by the public investor in the meantime) has also bowed out, and the start-up is back at square one, except that a year and a half and a wealth of motivation have been wasted.


How would things have been different with a private venture capitalist?

- The biggest difference is that a start-up is financed completely until break-even is reached,* allowing the founder to concentrate on business right away, and giving both employees and customers a reliable outlook.

- Optimal assembly of the management team: When the founder team has no previous start-up or industry experience, the venture capital investor can help round out the team so that the company runs smoothly and efficiently right from the start.

- Use of "industry best practices" from the beginning: You don't have to try everything out for yourself to identify the best processes – others have already done that for you.

- Co-entrepreneurs are ideal for team players; each party contributes what they do best – you the technology and the energy to market it, the venture capital investor the experience gained from many successful and less successful start-up investments. "Hands-on" venture capitalists are your biggest supporters.

- Warning: With venture capital investors there is no "trial phase" or "light" version of a start-up during which process and focused action can be disregarded. Extra (financing) rounds cost money and stakes – why not do it right the first time?


Everything in life, of course, has a flip side, and you probably do not need venture capital financing if you think:

- you earned ample money with your last start-up,
- you won't learn very much more,
- we all need to stop and smell the roses,
- the state knows exactly how to set up start-ups, that's what the taxpayers' money is for, after all,
- that venture capital investors are "locusts" that destroy jobs,
- that 100% of a small success is better than 50% of a great success.


If you are interested in VC financing nevertheless, or wonder if you should be, send me an e-mail: b.geiger@triangle-venture.com.

*Not in biotech, where other laws apply.