In September 2019 I quit my well-funded job in research to start pursuing what I consider my passion and which later manifested in 123AI.de. I did this despite having to support my family. Moreover, my idea was to rely on building an interested audience, which, pretty clearly, will take a long (very long) time and will burn resources month by month. So, how did I start? Here, I put together 3 basic and 2 advanced financial options that I considered while starting my business in Berlin, Germany and maybe, who knows, this will be useful for someone thinking about following her passion. Please keep in mind that in a realistic scenario, combinations of fundings und sending multiple applications are the norm.
The easiest way to go is to just solely rely on your own savings. While it is the easiest way, it is not the most sustainable and I would not recommend it as your main way of funding. It might help out to bridge a short amount of time but try to avoid it for longer periods. Another way to look at this is, from an investor’s viewpoint: To be on the safe side, you should invest no more than 10-25% of your own capital to fund yourself. If you pass that line, well, you gonna have to kick yourself to get some money rolling in which could mean to get again a (half-time) job.
In my case, I did have some savings but not a lot and I used it for the 3-month payment gap imposed by the Bundesagentur für Arbeit (federal employment agency) for quitting my job. Which brings me to my next point.
#2 Federal Employment Agency
The federal employment agency gives you money if you become unemployed. Well, not really, they not gonna give you money right away if you quit your job. Also, they not gonna pay forever and, by the way, they expect you to stay alert 40h / week and to apply to jobs. So, relying on this money could be a pain in the neck. However, they have a great program, the Existenzgruenderfoerderung, which gives you 6 months of your unemployment money, a bit more if you have children, and another 300 Euros on top of that to go start your company and not getting bothered by them at all. After 6 month, you are going to be evaluated and can apply for another 9 month à 300 Euros. For this, they going to need some stuff:
- Business and Finance plan (see below for some hints)
- External evaluation (there are many ways but I used this service)
- Certificates, CV, etc pp
The bummer is that, nowadays, each consultant has to turn down your application, if they can place you in a company in the near future. I.e. if you have a tech-background, it is not very likely that you will get this funding right now.
Due to pure luck, I was able to get this as my initial funding and use the time not only to further 123ai.de but also to find and apply to subsequent funding.
#3 Exist: a great way of funding your startup
If you happen to have an innovative idea, a team consisting of no more than 3 people (less is possible though not likely to get the funding, one having a law or economy background is a plus) and worked or studied at a university no less than 5 years ago then you are applicable for the EXIST Gründerstipenium. This is a great way of starting a company as you get access to a wide network of mentors and collaborators as well as one-year funding consisting of 1.000-2.000 Euro/month per founder plus an additional 10.000-30.000 Euro of general-purpose capital, 5.000 Euro for coaching as well as offices and internet connection.
There is a number of strings attached but the most important is that this is very competitive and takes some time (plan with at least 4 months until start). Albeit designed as a time to build a functional prototype/MVP, due to the competition, you better have some working examples at hand and have deep knowledge about your future customers (which you better prove to exist).
Applicants are selected after pitches at the Centre for entrepreneurship at the TU Berlin (if you happen to be in Berlin) and invited to write an EXIST application (which still can be turned down). While this is one of the most competitive EXIST centers, they also happen to be the ones with the highest success rate (application to funding ratio ~80%).
#4 Incubators, Accelerators, and Business Angels
Technically, these are three distinct ways of getting funded and serve different purposes. However, I put them here together because they vary a lot and are all three equally exciting.
Business angels (or angel investors) are typically wealthy individuals and aim to help entrepreneurial individuals succeed with a business idea by investing their own money. They invest their time as well as provide connections to their larger network in order to help guide the entrepreneur in the new business venture (from Debitoor). Incubators are companies that help new and startup companies to develop by providing services such as management training or office space (from Wikipedia). Finally, startup accelerators (or seed accelerators) are fixed-term, cohort-based programs that include seed investment, connections, sales, mentorship, educational components, and culminate in a public pitch event or demo day to accelerate growth.
From these definitions, the latter two focus on the typical existing startup, ie. two or three founders with a product idea and functioning MVP that need help to scale. However, there is a lot of variation and exciting opportunities in these fields, especially in Berlin but this goes way beyond this article and will be covered in another. If you want to find out more, here are three links to get you started:
- The most influencial incubators and accelerators in Berlin
- An extensive list of incubators and accelerators in Berlin
- A list of angel investors in Berlin
#5 State funding
Most federal states will have their respective funding programs. In Berlin, you can find this page here. While it contains the usual suspects (EXIST and Existenzgründerförderung), it also contains e.g. credit-based programs for KMUs (small and medium-sized companies), industrial research programs, and others. Most important for entrepreneurs starting out might be the GründungsBONUS which pays up to 50.000 Euro for young startups and solopreneurs. As with many federal programs, applications can be complicated and will take some time. There is a number of specialized companies helping with the more advanced and high-profile applications.
More important stuff
It is important to know your expenses and keep them as low as possible. E.g. if you start your own business, you need to cover your health expenses from your own money. This can be quite an issue in the beginning as you have to at least pay 200 Euros per month. For each 1000 Euro you will have to add 100 on top of that. And this includes estimates, not actually real money. At some point, you might also want to get a tax consultant. They have quasi-fixed rates depending on your estimated earnings.
In many ways, it is easier to build a company with a team of people. This holds true for motivation, pure working power, and due to the fact that most funding opportunities are explicitly built for teams and not solopreneurs. On the flip-side, many startups fail due to leadership and personal issues of the founders, so starting alone can be an advantage as you can move fast into one direction (could be the wrong one though) without having to motivate and convince your co-founders. Discussing the pros and cons is worth a whole article in itself.
I was not a big fan of this myself but you need to get your idea into a Business plan. Even though this plan of your idea will ultimately never come into existence 1:1, it forces you to think about the nitty-gritty details and how to sell your ideas. Moreover, financial planning can be used to explore best-case and worst-case scenarios and as a way to control your expenses. The BMWi (federal bureau for economy and energy) and the KfW (Kreditanstalt für Wiederaufbau, state-owned), both of which are great sources for entrepreneurs, teamed up to build the Gruenderplattform. On this platform, which is completely free of charge, you are guided through building your Business plan with great tools and examples ie. for the finance plan. I used this for my own plan and it wasn’t nearly as painful as expected.
Finally, if you’re not single and you have a family, you really need to get them aboard your plans. This does not mean that they have a saying nor that they are supposed to like your idea (most people will not like your idea) but they have to see that you have prepared yourself, that you are not selfish, and accept
Starting your own business and quitting your job will always contain a certain level of uncertainty. You can reduce this uncertainty by not only preparing and propelling your business idea but also, to keep an eye on the funding opportunities that suit your needs. Don’t be shy to apply and if it does not work out, at least you learned something and can make your next application a bit better.