Financing opportunities

In simple terms, a business idea can be funded by two kinds of financing strategies. So-called bootstrap financed enterprises are those, whose start-up and expansion pose no remarkable risk investments to the business. Many service enterprises utilize the bootstrap financing strategy; they finance their own activity with the best possible financing – sales proceeds from their customers. In addition, they may obtain public support, bank loans and cash management in developing their business in a moderate manner. These enterprises grow "one customer at a time", so their product is not easily scaled up and distributed. The objective of the entrepreneur is to create a quality, profitable enterprise and it is not the intention of the entrepreneur to sell it in the immediate future.

In contrast, enterprises with large business potential and, correspondingly, a massive need for capital without collateral security, are prospective venture capital targets. The entrepreneur's primary interest is to create, develop and finally to detach from the company and the aim is simply the realization of the appreciation. A risk investor buys a share from a company and after around five years, when the value of the company has increased remarkably, sells his/her investment through mergers and acquisitions or via an initial public offering. The capital investor will be seeking a five-to-tenfold return during his/her possession.

In practice, growing enterprises require several financing rounds as they gather the funding needed for growth. It is essential to decide already in the initial stage of the enterprise, what kind of business it is seeking; if already during the seed funding too large a portion of the ownership has been conceded away from the entrepreneur, then further financing rounds will be difficult. The early stage financing plays a critical role because the company's valuation is then very small and thus with a relatively small investment, an investor can sometimes claim an inordinately large share of ownership.

A capital investment should not simply be considered as only money but knowhow about the capital investment by company's manager and access to networks in developing the target company. In the hi-tech fields, the requirement of rapid growth often is a risk capital investment in the company because start-up and development of business is not possible without a sufficiently large financing package.