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Three ways to invest in startups

Lana Iliev, 02/10/2021

Be there right from the start and generate attractive returns: this is what investors hope for by investing in startups. In the meantime, this form of investment has become so popular that it has even had its own television program, “Die Höhle der Löwen”.

Read which ones here Opportunities it for private investors there to invest in startups and how it works with the Risks looks like.

Why invest in startups?

Every beginning is difficult: This also applies to business start-ups. A particularly big problem is posed by the financing Dar: Banks refuse to grant loans to small companies because of the high risks, and an IPO is not an option at this stage either. The solution is investors who invest in startups.

But investors are not acting out of pure altruism: Young companies have one great growth potential. If an innovative business idea successfully asserts itself on the market, startups sometimes generate profits high returnsin which investors participate. Just think of the numerous startups that have been bought up for dizzying sums:

  • WhatsApp bought up by Facebook for $ 19 billion (2014)
  • Pillpack bought up by Amazon for $ 1 billion (2018)
  • DeepMind bought by Google for $ 500 million (2014)

The attractive return prospects are often offset by a particularly high risk, which is why investments in startups are also referred to as venture capital. The reason for this is the uncertainty about how the startup will develop in the future and the numerous hurdles that have to be overcome. Despite the immense risks, 743 startups in Germany were funded with more than € 5.3 billion in venture capital last year.

Venture capital in Germany: Annual volume in millions from 2016 to 2020

Source: EY Start-up Barometer Germany 2021

Three ways to invest in startups

Investing in startups is nothing new. Nevertheless, in the past this investment was mainly reserved for large investors and institutional investors. Meanwhile, however, also exists increasingly for private investors the opportunity to participate in the successes of young companies.

1 | Venture capital funds

Venture capital funds, venture capital companies (VCG) or venture finance companies are classic ways of investing in startups for a long time. It refers to Private equity fundswho specialize in startups.

Private equity funds (“private equity capital”) are investment funds that acquire shares in companies and then sell them again at a later date. Private equity funds are mostly called AIF funds and are therefore subject to high restrictions, so that private investors in Germany cannot easily invest here.

Investors in venture capital funds benefit from the Expertise of a fund managerwho invests in promising startups for them. At the same time, the investment is automatically spread. But this service has to be paid for with sometimes high fund fees. This is a special one expensive asset class. In addition, they are required Minimum investment volume much higher than with other investments.

2 | Business angel networks

With a Business angel is meant an investor who supports young companies financially as well as with their experience and contacts. You contribute to the startup's success in a variety of ways and, in return, are involved in it.

Business angel networks enable wealthy private investors to make contact with startups. With regular To meet Startups pitch ideas, network and raise the required venture capital.

Participation in these meetings and access to such a network is not open to every investor. A certain is required capital, since mostly large sums of venture capital are provided, as well advanced knowledge in corporate management, the valuation of companies and the legal aspects of a company participation.

3 | Equity crowdfunding in startups

Crowdinvesting, on the other hand, also enables small investors to invest in startups, as investments are already made here low investment sums are realizable. Crowdinvesting is a relatively new and innovative way of investing money.

On online platforms, startups introduce themselves using videos, business and financial plans in order to raise capital. In contrast, there is one large number of investorswho can jointly invest in the startups with a minimum investment volume of € 250 per person. In this way, large investment sums come together, even if the individual investors only invest small amounts.

Crowdinvesting should not be confused with crowdfunding. The principle is similar, but with crowdfunding it will be donate while crowd investing is a form of Investment with a return prospect acts.

In return for their investment, investors are about to crowd invest participatory subordinated loans Participate in the startup's future profits (or losses). Profits usually arise from the so-called exit, when a startup is sold or goes public.

Usually fall no direct costs for the use of crowd investing platforms. The two largest German crowd investing platforms for Startups are Seedmatch and Companisto.

There are already numerous crowdinvesting platforms in Germany that enable private investors to invest in startups. The prerequisites for the investors are quite low, because they only have to be fully competent. Special knowledge or qualifications are not expected.


Venture capital


Funds

Business angel


Networks
Equity crowdfunding

for small investors


suitable

little


Minimum investment


volume

Operational


economic


Knowledge required
High costs

Five things private investors should be aware of

Equity crowdfunding is the best way for private investors to invest in startups and capitalize on the profits of young companies. However, there are a number of disadvantages to this investment that you should be aware of.

1 | High risk

The high return prospects when investing in startups are offset by particularly high risks. Only if a start-up manages to generate profits can the return for investors be leveraged. But many young startups cannot hold their own against the great competition and fail. If a startup is forced to file for bankruptcy, it usually comes to investors Total loss.

2 | Expertise

Even if business knowledge is not absolutely necessary for crowdinvesting in startups, it is necessary in order to be able to correctly assess the chances of winning.

3 | Partial subordinated loan

In crowd investing in startups, profit sharing takes place via participatory subordinated loans. The profit-sharing loan is originally derived from the idea of ​​granting the lender no fixed interest, but rather one that is dependent on the profit and / or is determined according to the profit of the company. This success-dependent or success-oriented interest rate is, in addition to the subordination of the interest and repayment entitlement, the main distinguishing feature of a classic loan.

In contrast to classic venture capital investors, crowd investors have no direct participation and therefore no direct participation no say in business decisions. There are also holders of subordinated loans in the last tier. This means that in the event of bankruptcy, they are the last creditors to be served from the bankruptcy estate.

4 | Dilution of returns

Equity crowdfunding in startups can dilute returns. There several rounds of financing are common, gradually more and more stakes are issued in a startup. The number of investors increases and the relative share in the profit sharing of all investors shrinks. On the stock exchange, subscription rights prevent shares from being diluted. When it comes to crowd investing in startups, there is no comparable protection.

5 | Uncertain duration of capital commitment

Since bullet loans are usually granted in startups in equity crowdfunding, there are mostly no fixed terms. The repayment date is therefore uncertain. With some crowdinvesting providers there is the option of terminating the participation agreement after a minimum holding period and participating in the current success of the company.

It is questionable whether it is really advisable to terminate such a contract early. In the first few years, the profits of a startup are usually immediately reinvested in the further expansion of the company. There is not much left for investors during this time.

All in all, young companies need an average of five to seven years to become profitable. When investing in a startup, capital always over a longer period of time bound and is not available.

With crowdinvesting, private investors can not only invest in startups, but also in property. BERGFÜRST, platform for digital real estate investments, does not provide investors with partial subordinated loans, but with secured bank loans fixed terms as well as fixed rates between 5.0% and 7.0% p.a.

Investing in Startups: Checklist

If you want to invest in startups despite the risks mentioned, you should consider the following points:

  • Only invest when you have the capital you invested dispense can.
  • Make sure you have enough Risk diversificationby investing in different projects.
  • Remember that the invested capital over a longer period of time bound is.
  • Make sure you do that Business model and the Business plan Understand the startup.
  • Ask yourself if the given Sales forecasts are realistic.
  • Think about the opportunities for the startup in the Competitive environment stand.
  • Gather information about that Founding team: What experiences and qualifications does the team have?
  • Make sure you get the Investment terms understand.
  • If something is unclear to you, ask You after.

Image copytight: Sunny studio / Shutterstock.com

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