Already a few months ago we reported on a comprehensive cooperation with the oldest packaging company in the world. Now the global market leader for flexible packaging participates in one of our subsidiaries. For us a reason to lose a few words about the financing of tech startups in Germany.
Why German startups need to be even better
As you know, we also use our blog to talk about the background of a startup's life. An important topic, which is often discussed only in case of success, is financing. It is nowadays - with few exceptions - no longer possible to build a sound business without solid financing. Or in other words: Without having money, you can usually not earn money.
The investment culture is an important reason why young CEOs and CFOs are crying out to sleep at night, especially in Europe. While overseas, the two hundredth dating startup is still acquiring sums that bring tears to the minds of mid-sized companies, in Europe, as in 20 years ago, when banks were still responsible for financing companies. And at a time when more capital is available than ever, which in turn attracts less interest than ever before.
Not that we misunderstand: There are them, the seed and early-stage investors. Incubators, business angels, funds, etc., everything is there. Berlin sends its regards. But the following two numbers speak volumes: 2014 spent 26 billions of dollars in startups in the Silicon Valley alone. In the whole of Germany at the same time there were whole 3 billions.1
One can confidently assume that only the startups with the best connections, the most promising ideas and the most professional implementation have any chance of being solidly financed in Europe.
But is it possible? - Yes!
Especially startups in the technology sector need extra capital to finance the way to the functioning prototype. Usually, not just a few software developers are sufficient, but - as is the case with the biofabrik - various specialists from various fields, some of them highly endowed, have to work together in a team. And for a long time.
In this phase, the risk-conscious managers of non-US investment companies hold back as sharply as the banks did. Anyone who knows how to clearly put his vision into words and who can convey the sense of society in three sentences should in the meantime finance this phase through the crowd. Crowdfunding platforms like the German Seedmatch If desired, the campaigns can be implemented professionally from conception to completion.
We also acquired a seven-figure amount within eight weeks with self-organized crowdfunding. Money for which we would have had to negotiate with investors for several months and, in the end, surely have to pay a high double-digit percentage. For small investors, who invest with slightly calculated risk but good return opportunities, in contrast to accountable managers, only sense, professionalism and the ability to sell themselves and their idea counts. They are the new drivers behind innovation - a trend that is sure to strengthen in an environment of low interest rates and cheap money.
Startups who turn to the crowd are rewarded with simplicity, complete honesty, and a first proof-of-concept. If it does not buy the crowd, then an investor would not have bought it either. For the phase up to the prototype this financing form suffices, it is sympathetic, contemporary and now also completely established for larger amounts.
Startup financing when the prototype is up and running
If the prototype works in its beginnings, the principle is proven and given numbers, startups open up completely different possibilities for us, also in Europe. Assuming that you have developed something that the world is waiting for and the business plan gets carried away, you can actually get professional money now.
Although the prototype of our White Refinery has done the proof-of-concept a long time ago, a redesign of the size of a coke machine seemed worth an extra year of development. Because thus was a plant under construction, which can turn plastic waste into energy, but for much more buyers is interesting.
With a working prototype that solves an actual problem, we have the resources to tackle the next phase:
- We could have now raised real equity through M & A advisors and even targeted investors. Unfortunately, in this phase, it is still relatively "expensive" to collect professional money, as the threshold to enter the market is still relatively high.
- Individual customers were also prepared to pay in advance - certainly one of the smartest ways to finance themselves without paying shares in this phase. And incidentally, one that is perfectly common in our model US market in this respect.
- However, we decided on a third form.
Give up to have more after that
With the Danish and global Schur Star Systems, we have decided to favor a strategic partner over pure financial partners, even though we could have raised more money than we did for the same ten percent stake in subsidiary Biofabrik White Refinery GmbH to have. In consultation with the buyer, the effective purchase amount is not published.
There are a number of reasons for choosing this route: Firstly, the Schur Group has high demand for our waste-to-energy plants with 13 international companies and plants on four continents. The company wants to use waste-free production and energy from previously disposed of waste for its production. A perfect symbiosis.
It gives us the opportunity to test our technology in practice without the pressure of an external customer in all parts of the world and to perfect it for different application scenarios. At the same time, with its many branches, the Group offers us a free presence in many cities and fairs around the world and our potential customer demonstration systems in day-to-day, practical operation.
Last but not least, with 800 employees, Schur is one of the largest machine builders in the industry and can therefore take on assignments in engineering, series production or later in support at excellent conditions. Things that we urgently need for rapid global expansion of the technology.
How it goes on - the growth phase
By the middle of 2017, the prototype of the Biofabrik White Refinery is to be fully developed to market readiness and delivered to the first plants in order to prove its worth for the first time in practice. Subsequently, we will first expand the European sales, secure series production capacities and ramp up production. In this phase we leave the startup and thus also the difficult part of the corporate financing.
A functioning prototype that has been tried and tested over the long term, and at that time already a pilot series, an established sales network and proven demand will then open up the fabled market for corporate financing. But we'll talk about that best when we've done our homework.
Until then, we look forward to winning the reputations and strengthening with a partner like Schur, and also to keeping you informed of our next victories and setbacks (you know, we're writing about that as well). If you are not already here, become a fan of Biofabrik on Facebook or sign up for our newsletter below.