In our glossary, we want to give you some technical vocabulary to make it easier to understand each other. Among other things, you will find terms used in connection with corporate succession by private equity.
This refers to the increase in value that is achieved through the contribution of management know-how and support from the investment company.
Takeover transactions in which a large part of the purchase price is realised through asset sales of the acquired company. The sales of non-operating assets lead to a reduction in debt service.
Acquisition of the individual assets of a company. This involves the sale of the assets belonging to the company, including the associated labour, contracts and other legal relationships.
Acquisition of several companies to create a larger group/holding.
Buy-back: exit variant of a venture capital company from a company, in which the former shareholders can buy back shares in the company they have founded.
After the FFF – Family, Frieds, Fools, Business Angels are often the first external investors for a start-up.
If founders or management of a start-up want to raise external risk capital to develop their business and grow faster, they will not be able to avoid company valuation. It is in the nature of things that founders want to achieve the highest possible valuation, as they will then have to sell fewer shares for the same amount of capital, or dilute it less. The investor as a negotiating partner is in a position to obtain an acceptable quota for his investment. For us, however, it is not our primary concern to buy as many shares as possible from founders. Rather, we want the founders to be highly motivated to work on increasing the value of the company. Part of this motivation is the own shares in the company. This is why we are always a minority shareholder.
In company valuation, a distinction must be made between pre-money and post-money valuation. But the connection is simply post-money = pre-money + investment. In the negotiations, therefore, you have to agree on the pre-money valuation and the required capital. In the course of development, the company valuation should increase much faster than money is invested. This is how value is created.
The simplest company valuation can be done with liquid, publicly traded values. To find out the valuation of SAP, Tesla or Shell it is sufficient to look up the current stock market value. For companies that are not publicly traded, things are more difficult. In the private equity sector, so-called multiples are often used, which vary from sector to sector. In this case, a variable such as turnover or profit is multiplied by an industry value to obtain a valuation indication. Another widely used and scientific method is the discounted cash flow (DCF) method. Here, future cash flows are assumed and discounted to the present. The basic idea here is that money that flows in the future is worth less than money that flows in today. This also makes sense because payments in the future are associated with risk and are not yet available today for alternative investments. It would therefore be necessary to borrow the money in advance in order to be able to invest it today.
However, both methods are problematic in relation to start-ups. It does not make sense to apply a multiplier to a company that is not yet making a profit (but a loss) and has only a small turnover. It would rather lead to very small or even negative company values. The DCF method is also hardly suitable because it is extremely difficult to assume future cash flows in the case of a start-up without a history or reliable forecasts. In this case, such a large uncertainty factor would have to be priced in that the valuation would again be very low.
The usual methods are therefore not applicable to the valuation of a start-up, which is why this is discussed on a much more individual and case-by-case basis during the contract negotiations. An approximation can be made using an assumed exit value after a likewise assumed development and holding period. From this, a backward calculation is made and an estimate is made of how much money is needed to achieve this goal. It is also necessary to take into account the dilution that the respective financing rounds entail. As before, the risk must be taken into account in an appropriate manner. The second unknown factor, the assumed exit value, can be done through a peer analysis, in which it is researched which valuations comparable start-ups have achieved. Of course, this opens up the next difficulty, namely to find “comparable” start-ups. After all, every start-up should have USPs and thus not really be comparable.
It can thus be said that a fair assessment of a start-up is much more difficult and is based less on really robust factors. Therefore, it is the core business of a VC fund to assess technologies and business models and thus be able to evaluate them outside of measurable KPIs.
Due diligence is a careful examination, usually initiated by the buyer or venture capitalist, which is carried out when shares are taken over. The aim is to ensure as far as possible that the assumptions and conditions to which an investment in a company relates are correct and that all relevant risks have been identified.
There are various sub-areas, of which financial due diligence (examination of the financial situation), market or commercial due diligence (market analysis, analysis of the business model), tech due diligence (as the name suggests), legal due diligence (examination of legal aspects) and tax due diligence (examination of tax aspects) are of great importance for the VC investor. Especially for software start-ups it is becoming increasingly important to clarify to what extent used open source code may also be used for commercial purposes (IP-DD). The implementation is basically carried out by experts for the respective sub-area. Within the scope of these audits, various sources of information are used, whereby in particular company documents or data are analysed and discussions are held with the management of the target company. In addition, market data is reviewed, discussions are held with potential partners or customers and industry experts are interviewed.
If the DD examinations are positive, this represents a significant milestone for an investment. However, smaller aspects are often found which can be remedied or changed before an investment is made. If, for example, the IP-DD reveals that a company is infringing on fundamental patents or is not allowed to sell a product commercially, this can also lead to the termination of the process. Therefore, DD examinations are a very important part of the investment process, for which founders should be very well prepared.
Earnings before Interests and Taxes: A measure used in the valuation of a company on a debt-free basis. Other terms such as operating income, operating profit or operating income are also commonly used.
Possibility for lenders to acquire shares in the partnership or corporation to be financed, often at special conditions.
After the start-up the question of initial financing arises for many founders. In addition to their own funds and the so-called “FFF” – Friends, Family, Fools, many founders are eligible for funding and scholarships, such as the EXIST scholarship or the NRW Founders’ Scholarship.
If the first funds are exhausted or simply not enough, the question of further financing arises. The basic distinction must be made between debt and equity capital, whereby debt capital is not available for most young start-ups.
Debt capital or the credit business, is the classic business of banks. For a loan, especially for larger amounts, banks need collateral to reduce the risk. This is understandable and follows a simple mechanism: the weighing up of risks and opportunities. Especially in times of low interest rates, it is increasingly difficult for banks to make money with traditional lending business.
These opportunities, which tend to be small, also result in an equally small risk profile. In order to assess the risks of a corporate loan, banks consult ratings and ask for key business figures such as company age, sales, profits and profitability. If these values fall within a required range, the risk of default is statistically lower for a bank. In this case, debt financing of a company through borrowing is possible and often advisable, as it does not dilute the founders. In the case of debt financing, the company or the founder does not give up shares. The loan amount is repaid only plus interest. Moreover, outside capital is specially protected. In the event of insolvency, it is the first to be serviced.
In most cases, early-stage start-ups are young companies that do not yet have significant sales and almost always make losses. They also have little or no reliable history. From an objective point of view, the risk of a total loss is therefore much higher than with an established company, which often also has significant real assets. Debt financing for start-ups by banks is therefore almost always excluded, with the exception of special promotional loans.
In this case, financing through equity capital comes into consideration. Equity capital is the capital that you as founders have contributed or will contribute to your company. An equity financier or investor (e.g. a VC fund) therefore participates in the company’s capital as a regular shareholder and thus assumes full entrepreneurial risk.
Similar to the bank, for example, the VC fund is also oriented towards weighing up opportunities and risks. As a shareholder, it can participate fully in the positive development of a company. He does not receive a fixed interest rate but a dividend, profit distribution or, and this is the actual goal, a proportionate sales revenue in case of an exit. Due to this large upside potential, he is also prepared to take a higher risk by investing in an early-stage start-up. If the company does not develop positively, his investment will be lost.
An interesting side effect is that it is often interesting for banks in their lending decisions to know how high a company’s equity ratio is. A high equity ratio is generally regarded as healthy. Raising equity capital can therefore also increase creditworthiness or an increase in equity capital becomes a prerequisite for FC financing.
Most venture capital funds are so-called term funds. This means that it is clear from the outset how long a fund will normally be active and when it will no longer be active. There is a certain parallel to a start-up in that a VC fund is also dependent on (external) investors, as it does not initially make any profits of its own. This is primarily because the companies in which VC funds invest are not yet profitable themselves. Therefore, no dividends can be paid out of their company profits to the shareholders, i.e. founders and investors. A VC fund, like other investors, earns its money rather by ensuring that companies develop positively and that the investment can later be sold at a higher price.
Thus, a fund can be schematically divided into three (in some illustrations only two) life phases: The investment phase, the development phase and the disposal phase. What happens in which phase is practically self-explanatory. In the investment phase, money is drawn from the fund investors and invested in young, promising companies. These in turn invest their new funds in development, testing, sales, etc. When the fund has reached its targets for new investments, it is in the development or holding phase. This is where the portfolio companies are to develop positively and create value, also with the help of investors and network. In the subsequent sale or exit phase, the investments are then sold in a commercially viable manner.
The aim of every fund is of course to be able to sell as many of the investments made as possible at a profit over its term. If this is the case, the fund can be closed or wound up. However, it is quite possible that investments made early on may develop much faster or more rapidly than average, and investors and founders may decide to seek an exit at an earlier stage. Other cases, however, mean that the investments could not yet be sold at the end of the fund’s term. In these cases, individual solutions are then found by mutual agreement of all parties involved. Of course, there are unfortunately always investments that are lost during the term of the fund, as developments do not proceed as planned and the companies go into insolvency.
The typical term of a VC fund is 10 to 12 years. As only existing investments can be made from the middle of the term (usually money is reserved for this purpose), most VC companies try to launch the next generation of funds. In this way, the terms of consecutive funds overlap by about 50%.
Once a professional investor is on board, he also wants to be informed about successes and failures and the general development of the start-up. But the most important thing is that the founders can concentrate on the essentials. This is why we keep our reporting requirements as lean as possible. In most companies, the required data is collected in one way or another anyway, in order to keep an eye on their own processes. Here are a few typical data that we request from our companies:
BWA/SuSa: Business management evaluation of the past period, on a monthly basis.
Cash-Statement: Information about how high the burn rate is, how long the money will last, whether the cash register is already filling up.
Staff: A short information about how many people work for you.
Management Summary: A little prose about the business development. Often this part can also be covered in a monthly Jour Fixe-Call.
BWA and SuSa usually come directly and automatically from the tax consultant. We provide a compact spreadsheet for the remaining figures. This is filled in once a month. The aim is not to have to spend more than 30 minutes per month on it. You decide how the documents reach us. It is now common practice to set up a cloud room from which we can pull the data. Only please not by FAX ;).
We, like other VC funds, specialise in financing and developing young, promising companies in particularly early stages. In these early phases, most companies are not yet profitable and need external capital to develop further. For this purpose, start-ups raise money from business angels, VC funds and other investors.
Since start-ups in these early stages of development do not generate any dividends for the investor, our business model is to increase the value of a portfolio company significantly, which then becomes the common interest of the start-up and the investor. The capital, know-how and network of investors help start-ups to achieve precisely this goal. With the available funds, a company can compensate for its losses and at the same time invest in activities such as research, development, prototyping, validation, etc. This allows it to grow and develop much faster than would be possible without external capital. For founders it makes sense to give up or dilute own shares if this can be more than compensated by capital, help, etc. and the value of the company increases accordingly. In this way, all parties benefit in a way that would otherwise not have been possible.
If the start-up has developed very positively and the value has increased significantly, in very many cases external interested parties approach the company with the desire to take over. These are often already existing partners, customers, etc., who expect strategic added value from an acquisition. Because a start-up then has, for example, a special technology or a particularly clever business model, the buyers pay good prices for a company even if it only generates small or no profits at all. For the investors, this is the time when the exit is considered.
An exit means that the investors and often also the founders, if the company is well valued, sell their shares in the company, for example in the form of a trade sale, and hopefully make a significant profit. With the sale they then leave the company as shareholders. This is also the origin of the term exit. For us it is clear from the outset that our investment thus means a partnership for a limited period of time. We also make this transparent at all times. An exit can affect a company in such a way that it is sold completely and all previous shareholders are “paid out”. However, it is also called an exit of a single shareholder if only that shareholder sells his shares and exits as investor. If shares are sold by one to another investor, this is a so-called secondary.
Similar to the life phases of a fund, there are three phases in the cooperation with a fund. The acquisition phase is the phase in which an investment is examined, negotiated and implemented. By far the longest is the holding or development phase. In this phase, funds and portfolio companies work together to develop values and make the company successful. This is where founders and investors create what is subsequently sold in a successful exit.
If buyer and seller agree on all formalities, the formal cooperation between the company and the fund ends. In most cases, however, the founders remain with the company as managing directors or other responsible positions. In many cases, they also retain a stake in the company themselves in order to continue to provide an entrepreneurial incentive.
One might think that when an investor comes in, a founder simply sells part of his shares. However, this is rarely the case.
A management buy-in (MBI) is when a company is taken over by external management or the takeover is forced by external management with the help of an investor. This occurs mainly when an external management is convinced that the company is poorly managed and can be more efficient through better management. An MBI is also a way to take over a company as part of a succession solution. (Wiki)
The term management buy-out (MBO) refers to a company takeover in which the management acquires the majority of the capital from the previous owners. If the workforce takes over the company, this is called an employee buy-out.
The MBO has proven to be particularly effective in the case of company successions. In the case of an MBO of a listed public limited company, it is common to re-privatise the public limited company; in this case we speak of a privatisation MBO. This gives the management the opportunity to develop the company independently of the constraints of the stock market.
In the absence of heirs, former owners often prefer to hand over their company to persons they have known for many years. As a result, the former owners often offer their company to their own managers for purchase, as they can both trust them and assess their commercial skills. A further advantage is that it is not necessary to present all company documents for inspection by outside buyers, for example competitors, and there is a risk of disclosing confidential information.
In the event of economic difficulties, it is usually the case that the employed management is much better able to assess the situation of the company than external investors or reorganisers. In such cases, they are therefore usually more willing to restructure the company and then continue with it.
The transition from manager to owner requires an adjustment of mentality. Not all managers are successful in this.
If managers bid for their own company, there is a conflict of interest. A potential risk is the information advantage of the management, which can lead to the sellers being taken advantage of by the management. Management could also play down the future prospects of the company or deliberately sabotage it in order to buy at a favourable price.
Firmly agreed targets, the achievement of which will, for example, generate further capital flows.
In general, a milestone can be an event on which
is somewhat locked,
something is started, or
decide on the way forward
Financing funds that fill the gap between debt and equity in the capital structure, especially in MBO/MBI. Forms commonly used in Germany:
Subordinated Dept (subordinated debt)
Acquiring company – temporary legal vehicle for the acquisition of a company in the context of an MBO/LBO.
Invested amount plus capital gain, realised on exit.
The Pitch Deck summarises all relevant information that an investor, for example, needs for an initial assessment. Today, the pitch deck has largely replaced the business plan, at least as far as initial contact is concerned. The advantages are obvious – investors or partners can get an overview much faster, have something to show their colleagues and at the same time see whether the team is able to communicate the project in a concentrated and understandable way.
This makes the pitch deck a ticket for discussions and there is no second chance for a first impression. We do not want to give a rigid structure for a pitch deck, but for us it should not exceed 15 pages and the following content should always be included:
The team: Show us who you are, who can do what and why you work together.
The status quo of the user or “the problem” and its solution today: If there is one.
The new solution: If there was one before. Show us your innovation.
Your development: You just had the brilliant idea? You are working on a problem that you know from your professional experience? Show us how far you are and where you stand.
The market: Are you working on a solution for which there is exactly one customer in the world? Keyword scaling.
The business model: Customers and solutions are available? Then explain to us how you can earn money with them.
The numbers: Where can the journey go in the next few years?
Capital requirements and timeline: How much capital do you need? Who should the money come from? What exactly do you plan to do with it and when – by when must the financing be ready?
These are the most important factors that we need for an initial sounding out. It is often possible to add special content that only speaks for the specific start-up. For example a patent portfolio, references or specific statistics.
Always differentiate with your pitch decks whether it is the basis for a presentation or a “stand alone” brochure to read. For presentations: pictures, graphics, statistics – no long sentences! Always use an easily readable font size (the eye eats along). If you want to send someone a pitch deck for analysis, you may have more text.
VC company sells its shares in a company to another VC company or a financially interested partner.
“Startup”, “foundation” or “entrepreneurship” are all hyped terms that are sometimes mixed up or confused with each other. As we understand it, by no means every business start-up in the narrower sense of the term and not every start-up is suitable for an investment by a VC fund – even if the business model is great and a lot of money can be made with it.
First of all, this means that the distinction between a start-up and a company foundation is not a distinction between good and bad or right and wrong. Start-ups simply bring a few characteristic features with them that not every business start-up brings with it. Admittedly, however, the transitions here are also fluid, so that it is not possible to distinguish between black and white.
The classic rule for a start-up is that its business idea is characterised by a high degree of uncertainty. This has to do with the very high degree of innovation that a start-up brings with it. However, the innovation can relate to the product, the business model or both. Innovation means that something new is created and goals are achieved in new ways. These paths are not fully known beforehand. In this characteristic lies the high risk of a start-up based on innovation. Because it is not certain that a new way, a new product or a new service will be accepted and sold.
It is almost a basic law of economic theories that where there is high risk, there is also great potential. The same applies to a start-up. This offers above-average growth potentials through its novelty, as it takes paths that do not yet meet the standard. But it has the chance to help define this standard and to be one of the first.
In summary, a start-up is a business start-up that combines high uncertainty with high innovation and high economic potential. For this unique risk/reward profile, a start-up needs specialised investors who are prepared to take high risks with their equity capital in order to achieve high profits. On the other hand, business start-ups that refer to known markets, known offers and known customer relationships, such as the establishment of an engineering office or a café, are not considered start-ups in the strict sense. The risk involved in such start-ups is manageable, provided that conscientious preparation and suitability of the team are combined. That is why non-startup start-ups can often be financed by debt capital.
Sale of the company shares to an industrial partner.
The exit is the desired goal of founders and investors, because this is where the money is earned.
A venture capital (VC) fund invests money, network and possibly other resources in young companies that are in the early stages of business development. Many VC funds have a sector focus or invest exclusively in a specific target region. VC funds traditionally invest equity capital. In doing so, they assume the full entrepreneurial risk.
Unlike, for example, a classic family business with its own capital, a fund usually collects money from primarily external investors and invests this money specifically in previously determined areas, sectors and companies. An equity fund also does this, whereby the money is invested in listed companies, e.g. from the DAX.
Venture capital funds are basically classified as private equity, or “private capital”. Private equity means that the target companies in which the investment is made are not listed on the stock exchange – i.e. publicly traded – but are privately held, just like most GmbHs.
A venture capital fund, like the Seed Fonds Aachen & Mönchengladbach, therefore has investors who entrust part of their assets to an external administrator, the fund management, in order to achieve a certain return. These investors are called Limited Partners (LP). You can find our LPs here.
Do you have special plans for your company? We would be pleased to be at your disposal for a non-binding discussion.
Here you can contact our employees directly and personally.