How does startup funding work?

How does startup funding work?

The umbrella term for the market in which startups with external financing needs move to exit model is "emerging growth."


    The umbrella term for the market in which start-ups with external financing requirements move towards an exit model is "emerging growth". The aim here is to help a start-up achieve an enormous increase in value via a so-called venture case and external money, which is usually realized in exit scenarios.

    An essential part of this are financing rounds such as capital increases or convertible loans by venture capital investors, in order to provide the company with liquidity on the one hand and to actually realize the increase in value on the other. Generally speaking, the financing cycle of start-ups can be described in a phase model. However, each start-up follows its own rhythm, with industries also having a particular influence, such as pharma. and bio-tech. In simplified terms, there is a different frequency or needs in the individual phases and financing rounds depending on the capital requirement, the industry and the model, but these also follow a rough pattern.

    Basically, the financing of any start-up can be divided into three stages, which in turn are subdivided into phases. Each phase is accompanied by the corresponding financing round:

    • A. Early stage: (I) Seed phase (II) Startup phase (II)
    • B: Growth Stage: (III) Growth Phase (IV) Bridge Phase
    • C: Later Stage: Final Stage (V)


    1. Early Stage

    Start-up financing regularly begins in the seed phase. As a rule, this is financed from the company's own funds and reserves, as well as bootstrapping and friends & family. Only if the capital requirement is very high do founders start here with loans, subsidies and venture capital.

    a) Seed phase

    In the seed phase, you literally plant the seed for your company. The focus during this early start-up phase is on the business model and developing the product or service. Your capital requirements will therefore depend on whether your idea is a service or a product. Since you are mainly concerned with strategic planning, administrative tasks and brainstorming, the capital requirements are not as high as they typically are in other stages:

    • Government funding programs
    • Own reserves
    • Friends & family
    • Bootstrapping

    b) Pre-seed or start-up phase

    In this phase, you usually carry out the formation of a corporation, as well as the first real financing from outside funds. Company formation and market launch and adaptation of product or service are in the foreground.

    Compared to the seed phase, the start-up's capital requirements are now much higher, since the funds are flowing into the company and it has to be built up and expanded on the one hand, and protected from liquidity bottlenecks, liabilities and insolvency on the other. In addition to the marketing concept and product expansion, external consulting (legal and tax) is also required.

    Typically, funding is provided by:

    • Business Angel
    • Early-stage venture capital investors
    • Private credits
    • Incubators

    The usual form of financing is the convertible loan agreement, which has its advantages in this phase, as it is usually difficult to determine a company valuation. Foreign investors like to work with a SAFE agreement, which is similar to the convertible loan.

    If you're interested in this form of financing, you can schedule a free consultation here.

    2. Growth Stage

    The growth phase in emerging growth can again be divided into two phases, the growth phase and the bridge phase.

    a) Growth phase

    To build up a team and customers, as well as to establish your product, a first round of financing for your start-up is now necessary (if not already done). This phase separates the wheat from the chaff, so to speak, as it is about convincing VC investors of you for the first time and overtaking any competition in the market. 

    Financing is usually provided through convertible loan agreements by business angels or equity financing by venture capital funds. It is usually a good idea to pool business angels or to combine them in a joint agreement in order to simplify further financing rounds.

    If you're interested in this form of financing, you can schedule a free consultation here.

    b) Bridge-Phase

    In this phase it is a matter of building up a national and possibly also an international distribution network, of enlarging the team and thus also of increasing the market share. Now it results from regularly conducted investor talks to think about a possible IPO. 

    In this phase you regularly have a higher capital requirement, which is to implement far-reaching and long-term measures. This is done either via a capital increase, if it fits value-wise, and/or already secodaries are to take place, or via a so-called bridge financing, which is similar to a convertible loan.


    Finally, the final phase takes place. Here, you implement restructuring measures, introduce C-levels (i.e. management levels), leave the lean startup hierarchies and prepare the company for your exit, which ends either in an IPO or a buyout for you. That's why the existing founding team is supplemented by experienced, external managers beforehand, in order to bring a broader, objective view into the company and management.

    Since capital requirements vary, they are based on the growth and individual circumstances of the business and are usually done through the following options:

    • Financing by investors (PE or VC)
    • Debt capital
    • Stock exchange activity
    • Sale of business shares

    If not already done, the later stage is a strategically excellent time to sell a part of your shares (so-called secondaries). This gives you capital for your shares that you can now use privately, and you also remain in the company for the most part and receive further economically valuable input and network from the buyers as new shareholders.


    This model is only a blanket outline of actual behavior in emerging growth. There are few blanket statements, except that any financing should be well thought out, prepared and strategically structured.

    As a founder, you lose shares in percentage terms with each round. In return, the value of the company grows. From the founder's point of view, it is therefore important to be able to call up a very high value at the time of the financing round and to think two to three steps ahead with regard to the company's expansion plans (bridge financing) or the private life situation (secondaries).

    Foto von Daniel Donhauser

    About the author

    Attorney Daniel Donhauser advises with a focus on corporate law, employment law and tax law. His special focus is on the optimization and structuring of VC and M&A transactions. With his expertise in advising on company sales and investments, he helps founders to set up and prepare everything appropriately for financing or exit right from the start.

    More information: About Seite.

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