25 September 2023 - Diana Bluhm

How start-ups set themselves up for financial security


Tips from Starthaus Bremen & Bremerhaven

Documents for financing and the hands of two people
Are you overwhelmed by the financing options and don't know what might suit you best? We can advise you at the Starthaus. © Pexels/RDNE Stock Project

Product development, sales, competition, personnel - founders of a start-up have a wide range of tasks that cost time. Moreover, very few people are professionals in all these areas. They have to read up on topics for a long time, talk to experts or simply gather their own experience. And then there is the big issue of finance. How you can approach this area and what you should pay attention to.

In the CB Insights study on the "20 reasons why start-ups fail", there were several aspects that pointed to financial challenges. Right at the top was the reason: there is no cash left. This is indeed a killer argument for every business. Even in the "BWL 101" course, the phrase "cash is king" is taught, because without liquidity no entrepreneur can pay the bills and sooner or later ends up in insolvency. What can you do about it?

„Cash is king“

Start-ups should draw up a sound financial plan even before they are founded. A period of 24 to 36 months is recommended for this. However, this plan should not disappear in a drawer after the foundation just because the start-up capital is fortunately available.

On the one hand, we recommend rolling financial planning. This means that as soon as a month is finished, it is added to the back of your liquidity table. For example: It is the end of May 2024 and you have a financial plan for 24 months. As soon as June 2024 starts, May 2024 is removed from the table and a new planning month of May 2026 is added at the back and filled in. At the same time, you check your expected income and one-off and recurring expenses for the next one to three months. In this way, your liquidity table becomes a rolling financial plan. In this way, you automatically develop an active financial management that should save you from unpleasant surprises regarding the liquidity range of your start-up. If you establish this as a regular task, you can draw valuable conclusions from your entrepreneurial actions in retrospect, such as "Did hiring staff (with a time lag) lead to higher revenues?" or "Do higher marketing expenses have a direct impact on the development of turnover?".

With rolling financial planning, you ensure that you keep an eye on your financing and thus your liquidity in the long term and can draw comprehensible financial conclusions from your activities. This is important not only for you and your business, but also for your current and potential future investors.

After the financing round is before the financing round

You have secured your first round of funding and are ready to launch your product or service? Congratulations! Unfortunately, this usually means that you will soon, if not immediately, have to start looking for more investors. Especially as a new founder, it is important to be seen. So look for opportunities to network! In most regions there are contact points for start-ups that offer workshops or community evenings, such as the Starthaus in Bremen and Bremerhaven. Here you can easily get in touch with advisors and start-ups and get tips and information about the ecosystem. On the other hand, you might meet people who are willing to invest in promising ideas. Here it is especially important that you are on fire for your concept and that your enthusiasm sparks over to the people you are talking to. But you should also be able to show that you are planning your finances for the long term and have a good overview of the most important key figures.

The funds from the financing rounds often only last about six months, but a new investment acquisition can also take several months. Therefore, AFTER the financing round is also BEFORE the next financing round.

Of course, maintaining relationships with your existing financiers is also important. Inform your stakeholders about innovations, plans and your conclusions and the financial situation. This can be done, for example, via a monthly digital jour fixe. This does not cause any additional travel time and you can get straight into your topics. If you build a trusting relationship with them, they may be willing to continue to believe in you and invest in your business.

Good networking - more opportunities for new investors

Building and maintaining the network is time-consuming for many start-ups with few staff at the beginning. In addition to the many other tasks of a management team and especially the further development of the product or service, there is often little time left for networking. Therefore, it makes sense to divide the tasks as well as possible when building the start-up together with other people in the team. When networking, everyone in your team should not only have their eyes and ears open for your product, but also for finding potential backers. Everyone should be able to ante up the conversations first and then transfer them to the management.

A spreadsheet of the Startup Financing Cycle
In the course of the first years, a start-up often needs several rounds of financing. © Pexels/Ivan Samkov

The price must be right

The CB Insights study also shows that some start-ups got their pricing wrong and this ultimately led to their demise. This goes both ways: A price that is too high can lead to lower demand and thus lower sales than planned. If the price is reduced and demand increases, then the price was calculated too high. Especially in the first phase, start-ups only produce small quantities, which often triggers an increased unit price. Therefore, it is especially important here to explore possibilities to scale up relatively quickly and thus to be able to lower the costs and in turn the price. But be careful: even a constantly decreasing price does not look attractive, but gives the impression of poor management. If a reduced price does not change anything or only slightly changes demand, other options should be explored, such as stronger marketing or a clearer differentiation from competitors.

A price that is too low can also become a problem. Costs may not be covered and liquidity may decrease or funds may run out faster than planned. A low price does not necessarily mean high demand. Perhaps the market is saturated, the USP (unique selling proposition) is not emphasised clearly enough or the product is simply not accepted by the target group. Here, too, the consequence would be a lower turnover than calculated in the rolling financial plan, dissatisfied investors and the need to act quickly.

Basically, there are two variants according to which you can calculate the price: value-based and price-based. In value-based pricing, the added value determines the price. This means that higher turnover can be achieved more quickly without increasing the sales volume. However, cost reductions have no direct influence on the price and in direct price wars the arguments to buy must be clear to the target group. Cost-based pricing is the classic price calculation. All costs incurred plus a profit margin are added up to a price. If you need help with this, you can turn to contact points such as Starthaus Bremen & Bremerhaven.

The target group is at the centre

Some start-ups from the study said they had no business model or the wrong one. Unfortunately, a good idea is not enough to be successful. Many factors should be considered in order to plan for the long term. In our article on Product Market Fit, we introduced you to tools such as the Product Market Fit Canvas, the Value Proposition Canvas and the Business Model Canvas. After all, it is not only important that you are passionate about your product, but also that it meets the needs of your customers.

In case of doubt, it may also be necessary to realign the (product) strategy. In the start-up context, this is called "pivoting". Here, too, it is a matter of informing existing investors and other stakeholders and meeting them. On the other hand, new investors could be found because your service or product has changed again.

Support from the Starthaus

The Starthaus Bremen & Bremerhaven is optimally positioned with a team for start-up consulting. Start-up founders or teams of founders can make an appointment for free counselling at the Starthaus before, during or after their start-up. In this way, individual needs can be identified and questions answered.

In addition to counselling, there are programmes and events for start-ups: In the Investor Readiness Programme, you will learn what you should consider when looking for investors and how you can prepare your start-up. At the regular Fireside Chats, investors talk about why and in which ideas they invest, and start-ups that have been successful in their investment search. In the Product Strategy workshop, product experts accompany you in a full-day workshop on your product strategy and show you how you can anchor it meaningfully in your business.

As a segment of BAB - Die Förderbank, there are also financing options in the Starthaus itself, such as the start-up funding "BRE-Up", the Mikrokredit, consultation funding or venture capital. Feel free to contact us and we'll find out together what could help you.

Do you want to set up your start-up securely? Or do you have construction sites where we can support you? Then send us an email at info@starthaus-bremen.de or call us at +49 (0)421 9600 372 if you have any questions about your start-up (idea). We have the answers.

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