There have been plenty discussions on how it is to get into the bed with an investor. Especially venture capital is in discussion all the time. Though at least those have a clear motive, when investing: making more money with the company and eventually exit it through selling the shares (or the whole company). But with only few venture capital funds investing in Germany, a lot of money is invested from other parties and they are not always having that same motive in mind: so take a close look around the environment the investor is embedded in and follow the money trail.
Only this way you can be sure what the investor is really after with that investment and you might want to reconsider doing it as their objective might be damaging for you business in the long run. Down here I grouped typical Investors and explain why they do it, what this might mean for your business and try to answer the question: Investment, cui bono?
Smart-Money vs. Dumb-Money
Generally you should always look what it is they bring to the table. If there is nothing aside from the money, that is generally considered “dumb money” and I always advice to take the least amount of that as possible. Not only because you gain sooo much more having smart money in, but because in doubt those are only for the money and might don’t even understand your market position or company objective(s). And if you can’t explain them that in a difficult situation, they’ll simply bail on you in a crisis to protect what is left of their money.
(german) Business Angels
As the Tech-Startup-Scene in Germany is still quite young, only very few business angels have been successful founders before, who invest their own hard-earned money in new, cool and exciting things now. Most Business Angel Money in Germany still comes from the classic High-Educated Fields of Doctors, Lawyers and Business-Men and is given by men with an average age of 55 (just gut feeling here, no official numbers known). But that doesn’t necessarily make them dumb money, their business experience and network can help a startup a lot as well, and if you have a business with a lot of legal topics, a lawyer in your investors saves you a lot of money.
As for their objective, sure they care about the money, but often these Business Angels come on board to help out for a year or two and simply enjoy their work there. The money of an exist simply allows them to continue doing that for the next startup.
Many funding come out of University programs in Germany as well. This is often a combination of a University support system (with office space and stuff) and the Government run Exist program, which provides money to start your own business. These programs are often limited in time and money, but allow an easy bootstrapping and - important note - don’t want any part of the company (normally). The way the system works here, is that they bring you - even with exist - into their facility, that is considered partnership and money from the industry for with the University then gets twice the money in funding as they were able to acquire for you.
So as they are basically receiving money for finding money for you in that period, they don’t care about your share or your exit at all. Which is a good thing, but also a bad one. Because aside from providing space they often lack support. They do not care whether you are successful or do anything at all - at least their is no further benefit for them in that. Because of that I am very careful with university funds, as though it comes from the research facility, it is dumb money in most cases.
Often many startups take in partners for manufacturing or simply because they have a product in that same market already. That sounds very attractive in the beginning because it lets you get started quickly and often get big piles of money. But that is really dangerous money. Just think about these two cases: What do you think happens once you are more successful than your manafacturer is able to produce. You do not want to go the competitor of your business partner for help and that one doesn’t scale. Or if you develop a product which is actually supposed to disrupt that market? Once you get successful and their market share decreases, only very few companies do like that and continue to support you then. In both cases you cripple your business.
Aside from the obvious problem: once you might want to sell the company, you think you can sell it to their competition? Your only exist becomes that company, that is something they will secure when singing the contract. Or at least it will be messy then…
Not only in the U.S. but also in Germany, big publishers haven been a classical Exit-Sale for a while. But more and more of them understood meanwhile that it is more interesting for them to diversify their business and invest early on. Especially when it is an area, they have an interest in, like online publishing (services as well as platforms), content production and advertising. So if your company provides a product or service that could potentially revolutionize such a field or at least make a lot of money there from both publishers as well as end-customers, those publishing early funds might be very interested in you.
But their reason for investing might actually be more than just because they have experience in the field and need to cut their losses. Especially big publishers often have a bunch sub-companies for various aspects in their line. And if you offer a valuable service to them, such an investment often also means a bunch of new customers that you are introduced to via that publisher. And while that is great in the short term it might also means that same investor could have some real trouble when you start selling that service to their competitor - especially if that service is revolutionary. Or simply if you want to shift your focus away from those customers and go for a different field, it might be of such an importance for them that these investors simply don’t let you. And I do not have to tell you that both of them might cripple your business.
And I do not have to repeat the whole they-are-the-only-exist rule, once you created a product or service highly valuable for their other investments …
Media for Equity
A very special case of this kind of investment is Media (or Advertising) for equity. This is mostly used for growing a business and comes from major Media Partners like TV-Networks. The reason why they started doing this, because TV has too many open-advertising-minutes they can’t get sold. In order to not leave them unused, they often give them to Startups in Exchange for Equity. And as startups wouldn’t able to afford mass-advertising otherwise they often take what they can get and the channels have stuff to fallback upon, when they can’t sell all their minutes.
And though that sounds attractive at first, that is exactly what this means most of them: you don’t get those Superbowl-Minutes, but those when no else wants to buy. And though the actual minutes often are a big part of the marketing budget, with Media for Equity only, your marketing budget isn’t covered yet at all: you still need to pay an agency to create a good campaign and find money for the actual shoot. You can be happy if you can cover half of your marketing costs via Media for equity actually. So be aware of that when negotiating such a contract.
Lately there has been quite the trend of creating hip, cool looking incubators for almost every tech person run by big corp in the tech industry. That actually seems to be a global trend, but is especially present in Germany, where we only have few incubators attracting tech people. And their proposal sounds very good; not only do you get significant money for a nice evaluation, often you also get access to their infrastructure and internal services they offer to employees - like computer clusters, office space and stuff.
But again, there is a higher incentive for those companies then just going for the big money. By being part of the company, they can - on one side - stir your product into their line of product, make sure it is not corrupting their business and - on top - make you depend on them by making you build it on top of their infrastructure. (This is similar for certain Software-Licence-Companies as well btw: they give you the licence of the first three for free, for a product package of which you only need one or two product but after that you have to pay those licence fees for products you by then got used to thought you actual don’t need it)
But in here, there is even more: aside from having troubles being innovative, these companies have even bigger problems recruiting good people not only being able to do tech but also build actual products. That is why the money for these Incubators often comes from the marketing and recruiting departments. Because it is a great way to lure the people in: they have to come to the office, learn about all this great technology, build their own thing they get attached to as well as the Teams they work with. And buying a great technology for a couple of millions together with a great team and talented tech people (that is called “your exit”) is a more than cheap solution to their hiring problem.
Not all investments are equal. Not only the terms they write in the papers but also in the objective on why the parties invest in the first place. And more than often the objectives and what comes on top of the money is the much important part of the deal. So thinking about this beforehand is something you should really take your time for.