Money makes the start-up go round!
Financing is one of the key issues when starting a business. But how come financially weaker startups of fresh money? One possibility is crowdinvesting, a form of financing independent of credit institutions, in which many small investors invest small sums. What this is all about and how startups can benefit from this alternative source of money, you will find out here.
- Crowdinvesting for Startups – What’s behind the term
- Requirements for crowdinvesting
- Crowdinvesting on an online platform
- Crowdinvesting platforms in Germany
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Crowdinvesting for startups: That’s behind the term
The principle: Many people (crowd) each invest small amounts in a startup or a specific project and, in return, participate in the financial success if it occurs.
Crowdinvesting & Crowdfunding: That’s the difference
Thus Crowdinvesting, in contrast to crowdfunding, is primarily yield-oriented. Crowdfunding is primarily intended to support an idea; crowdfunding is primarily about earning money.
It will be determined beforehand when crowdfunding will be successful or from which entrepreneurial key figures investors will receive their investment plus return. Startups who want to get fresh money through crowdinvesting usually use online platforms. Here you can introduce yourself, convince potential investors of an investment and handle the transaction directly. However, under certain circumstances, permission is required.
With the help of the platforms, you can reach many investors with relatively little effort. Crowdinvesting is mainly used by startups that have been established recently or that have capital requirements that are too low for traditional venture capitalists. Incidentally, the word Crowdinvestment is only used in German-speaking countries. Internationally, the term “equity-based crowdfunding” applies.
Requirements for crowdinvesting
Every founder knows how hard it is to get a solid bank loan. Often, the promised loans are not enough to cover all capital needs. Here crowdfunding can be a real alternative to collect missing money.
But entrepreneurs should not put everything on the map Crowdinvesting, because whether the capital needed in the end actually comes together from the many small lenders, can be predicted in advance difficult. Better to use this instrument as an additional source of money and not as a substitute for loans from banks and business angels.
These requirements should be fulfilled by a startup:
If a startup fulfills certain requirements, the probability of being able to collect money on one of the online platforms increases:
- A healthy economic basis
- Promising growth plans
- An innovative, mass-compatible and understandable business idea with enough unique selling points to convince potential investors
- Proof of a functioning business model
- Proof of a sound financial plan
- Know-how for the promotion and implementation of a target-group-oriented crowdinvesting campaign (marketing)
- Sufficient capital to bridge the investment phase itself
If these conditions are met, more donors will believe in the success of the business idea and the business model and rather make an investment.
Crowdinvesting on an online platform
1. Selection of a suitable crowdinvesting platform
Meanwhile, a large number of crowdinvesting platforms has become established. Therefore, one should first deal intensively with the individual providers.
This is how you get an overview:
- What is the image of the platform?
- Which startups have been successful in collecting money here?
- Are there any competitors in the business field on the platform and how have they performed so far?
- Do you know entrepreneurs who have already gained experience here and share it with you?
It is a good overview, as possible, to procure. The desired form of participation is also an important criterion when selecting the platform.
These 3 forms of participation have become established:
1. Partarian loans:
This is the most common form of crowd investing. An interest rate that is based on the profit of the startup is awarded to the lender and thus represents the return. However, in the case of insolvency only minor claims to a repayment of the investment and possible interest.
2. profit participation rights:
As a special form of investment, the lenders are guaranteed certain rights to the company. This is associated with a profit sharing. The profit or creditor rights are usually tied to a term. There is also no vote or say.
3. Atypical silent participations:
As part of their investment, the lenders appear only as silent participants. It can be contractually granted a certain say. The amount of the respective profit sharing is fixed and optionally it is also possible to arrange a loss participation.
2. Due Diligence
Based on the documents submitted, the selected platform will first perform due diligence, ie the careful examination and analysis of the startup with regard to the economic, legal, tax and financial circumstances. The focus is on the business and financial plan. The result of the test is the evaluation of the company. If the platform finally adopts the campaign, the next step is the contractual fixing of the framework conditions.
3. Creating the investment profile
An investment profile will introduce the startup on the platform. The profile usually includes the business plan, a brief description of the investment, and an introductory video. On this basis, the potential financiers can make their own image of the startup.
4. Investment phase
Now it shows how well the startup arrives at the investors. At any time you can call up the current status and see how many percent of the targeted capital has been collected so far. How long the investment phase lasts is set in advance. During the investment phase, prospects will ask questions and want to be convinced. Here, the marketing specialists of the startup are asked to answer the inquiries promptly and to provide further information material. Once the specified amount of capital has been reached, the investment phase closes.
5. Contractual settlement
After a successful investment phase, the investors receive their investment contracts, in return the capital is paid out to the startup. But the work is not done. Investors expect that they will continue to communicate with them and be informed about the current state of development. On the one hand, they provide feedback, but sometimes they also ask critical questions. The platforms regularly request official status reports.
Crowdinvesting platforms in Germany
Since 2011, the volume of investments in crowdfunding has increased in Germany every year.
Of the total of 154 million euros invested in crowdfunding between 2011 and 2016 in Germany, crowdinvesting in Germany accounts for 63.8 million euros in 2016 alone, an increase of 39 percent over the previous year, according to the 2016 market report.
Crowdinvesting in startups and small and medium-sized enterprises reached a volume of 18.8 million euros in 2016, an increase of 0.4 percent over the previous year.