Bootstrapping & Informal Investors

Question 1

What are disadvantages of having external investors?

Answer 1

• Having no money has a disciplining effect. More money is not a solution for many problems.
• Founders lose control over their companies to a certain extent
• If failure is encountered external investors will react timely
• Working with other people’s money brings an inherent psychological pressure

Question 2

Name the 7 principles of bootstrapping?

Answer 2

1. Get operational quickly
2. Look out for quick break-even, cash-generating projects
3. Offer high-value products or services sustaining direct personal selling
4. Forget about the crack team
5. Keep growth in check
6. Focus on Cash, not on profits, market share or anything else
7. Cultivate banks before the business becomes creditworthy

Question 3

Why may the principles of success in the early stages hamper growth in later stages?

Answer 3

In later stages, ventures may need to:

• leave the market niche and dare competition against larger market players
• standardize products and services
• build dedicated teams for central functions, such as controlling, accounting etc.
• rebalance focus from cash to strategic goals
• hire more expensive talent

Question 4

Name the different kinds of investors, from informal to professional

Answer 4

Family, Friends & Fools
Crowdfunding
Business Angels
Incubators
Private Equity Firms
Venture Capitalists

Question 5

What are pros and cons of funding by Family, Friends & Fools?

Answer 5

\+ signaling effect
\+ availability
\+ founder hardly loses control
\+ improves company valuation in further financing rounds
\+ investors are patient

• limited volume
• danger to lose friends in case of failure
• hardly any additional contribution (i.e. consulting network)

Question 6

What are the pros and cons of crowdinvesting?

Answer 6

\+ signaling effect
\+ widespread availability
\+ founder hardly loses any control
\+ investors are very patient
\+ risk-free funds to develop MVP

• limited volume
• right to information creates extra workload for founders
• hardly any additional contribution
• full disclosure of inside information necessary
• potential conflict in future financing rounds (VC)

Question 7

What are the pros and cons of incubators?

Answer 7

+ provision of capital, founders can focus on developing their business
+ additional contribution (i.e. network, coaching & consulting)
+ internal matching system for co-founders and key talents
+ reduced costs of starting up through provision of infrastructure

• full disclosure of inside information necessary
• payments for services are made through transfer of shares -> dilution of voting power
• possible stigma as ‘soft’ venture team

Question 8

Describe the 4 forms of mezzanine capital covered in the lecture

Answer 8

Ordered from more debt-like to more equity-like:

Nachrangiges Darlehen (Subordinate loan)

• subordinated to other debt holders (“Rücktrittserklärung”)
• relatively high interest rates

Partiarisches Darlehen (Profit participating loan)

• structured like classical loan agreements
• no fixed interest rates, instead participation in profits based on some performance measure
• no loss participation

Genussscheine (Participatory notes)

• flexible form of shareholding, provided capital is paid back after “maturity” (fixed or minimum amount of time)
• participation in profits
• participation in losses
• no voting rights

Stille Beteiligung (Silent Partnership / Dormant Equity Holding)
- participation in profits and losses
- only control-rights, no management
- silent partner is creditor in case of liquidation
Atypical silent partnership:
Special case where partner is also participating in company’s assets -> participates in proceeds when company is sold