Entrepreneurship exists at many different stages. You can be completely new to the entrepreneurial universe and face a sea of new scenarios and opportunities that you have never seen before. You can be a professional serial entrepreneur – and you can also be an industry expert who wants to make your own company. Between this span, there are approx. 100 other stages of entrepreneurship – and therefore the entrepreneurial universe is generally a very broad pool in all kinds of industries. On the other side of the pond sit the investors – and just like the entrepreneurs, investors also come in very many versions. They can basically (all) be thrown in one of these boxes:
● FF&F: Fools, friends & family
● Bank and loan funds
● Accelerators & Incubators
● Business Angels
● VC (Venture Capital)
● Capital funds
● And probably also a few other kinds
Under each of these groupings, there are a number of sub-categories in which investors specialize or invest only. The sub-categories can be:
● Geographical location
● Stage (early-stage, late-stage, etc)
As you can probably already sense now, it is important to be reasonably sharp on who to take on the journey. The most important thing is that you do not waste your time walking down the wrong path – at least if it can be avoided by choosing your options carefully. This is primarily due to the fact that it is very difficult to seek capital in terms of time, resources and energy.
Let’s just try to review the individual groups so you can get an idea of the difference between the different investor types.
The 3 famous Fs come from an American phenomenon where one borrows or receives money in exchange for giving up some ownership interest. It’s an easy way to get started, and at the same time, you also have access to the 3 Fs in your nearest network.
It often happens that the 3 Fs finance first-time entrepreneurs or startups in more “stationary” industries such as restaurants, clothing brands or the like.
In our opinion, it is not particularly big in Denmark – at least not from what we know.
In more traditional entrepreneurship, the bank has previously played an active role in providing loan financing, but it is no longer the preferred source of financing. This may be due, among other things, to the bureaucratic hassle that prevails. It can also be due to the demands that are made, as well as the fact that people would rather bring “smart money” to the company than just “empty” financing.
As an additional “opponent” to the banks, we have also established a fantastic lending environment in Denmark in terms of risk capital. For good examples, this can be seen at Vækstfonden and Nordjysk Lånefond, among others.
Banks are often a good source of financing if the business has proven its worth and there is a need to invest heavily in assets – for example, machines, warehouses and office facilities. Based on their own and network’s experiences, banks are not so often rewarding and cooperative in the start-up process. They demand budgets 5 years into the future (which will not hold anyway), and they also expect that you come with 80% self-financing and that you are personally liable for it all. It fits very poorly with the process as a startup business that scales aggressively, to begin with without making money.
In a somewhat similar direction – but to my understanding – with a completely different risk profile, we have loan capital such as Vækstfonden and Nordjysk Lånefond. These are often the same accounting requirements, where the guarantee requirements are most often equal to 0. What can complicate loan capital from loan funds can be the co-financing requirement. Often between 25-50% financing from an external party is required. It can be a private investor, bank, VC fund or something else.
For example, in one of our companies, we have had Vækstfonden, where we should come with 25% from the other side. That financing was provided by one of our existing investors, and in that way, we had 100% financing in a combination of the Growth Fund and the private investor.
Crowdfunding is probably what one might call the latest form of fundraising, where entrepreneurs using their closest network or other interested parties (also in other contexts called the three Fs, Friends, Fools and family) raise money to find the idea.
Crowdfunding accommodates both large and small contributions, and this is typically done through crowdfunding platforms such as Patreon, Boomerang or Kickstarter.
It is typically seen in connection with, for example, games, physical products and similar. We know a few who have made use of this setup, but the crucial thing here is without a doubt the hype and marketing that makes the interest be there, and in that way make it a success. Unfortunately, it can also mean that you do not create the necessary interest, and possibly, your Crowdfunding fails.
Accelerators and incubators (like Scale Incubator) can be a great opportunity for startups in terms of acquiring capital – but also active resources. Often the incubator will buy x% of the company and in this way, you make sure that the incubator wants the best for the company. If the business is successful, so is the incubator.
The active resources as mentioned earlier are for example premises, back office and more. In addition, you often get one or more advisors connected, who can help you through the process from an idea to being a real company. It is a really good opportunity to apply for capital, as you are taken under the wings and get hands-on help. You have the opportunity to find your personal and the company’s weak points and thereby make use of the offered resources most effectively.
In addition to this, the advisers often have a large network and some have experience in start-up / scale-up because they have been there before. Thereby, they have huge experience and knowledge to be able to scale a company.
Business Angels are a very popular way for entrepreneurs to get capital into the business. And for good reason!
Business Angels are private investors who most often – in addition to injecting capital into the company – also actively join the company to help hands-on. Namely, it is typically wealthy people who have previously started and run a business themselves, and then want to use their acquired knowledge and capital to invest in other companies. Knowledge, experience and capital are of course very different from investor to investor, and this is something you must be very aware of if you start a dialogue and negotiation with Business Angels.
Business Angels are often seen joining forces with syndicates, which means there are more of them joining forces. That way, they may have to make less money (per person), but the startup will have more experience, skills and networks available. However, it is important that, for example, you get it together so that they have a “lead person” (= a leader), who coordinates between the syndicate and the startup. Otherwise, it can seem very confusing and very inefficient if the startup has to coordinate with 5-10 different people in a syndicate.
Venture capital must be considered venture capital, as venture capital funds often enter companies that are based on innovative solutions relatively early and at the same time have business models that are highly scalable in an international market.
Venture capital funds usually invest with the aim that the company is ready to expand both technologically, sales-wise and in terms of innovation at a very high speed.
In this connection, it is important to keep in mind those venture companies generally have funds with an investment period of 10 years, and this means that the scaling of the company must be accelerated, where the goal of the investment is most often the famous 10x investment.
Capital funds raise money from investors, after which the total capital is invested in companies, which are typically characterized as relatively mature and full mature companies. This should be understood in the sense that they typically invest with a view to developing and maturing the portfolio companies over a period of 5-10 years. When the private equity fund has subsequently achieved its targets in relation to the development of the portfolio company, the company is sold to new owners.
The phase can be roughly calculated in 3 steps:
● The capital fund is established through a fundraising process.
● The capital fund invests in companies.
● The capital fund sells the portfolio company.
If the ownership of the portfolio company has generated a profit, the return is divided between the owners of the private equity fund (the management company) and the private equity investors. When all the private equity fund’s companies have been sold, the private equity fund is dissolved.