Bootstrapping or investors: "Many go crazy when it comes to the financing rounds"

Bootstrapping or investors: "Many go crazy when it comes to the financing rounds"

Bootstrapping or getting investors on board? Sooner or later founders have to ask themselves this question. Feliks Eyser was a founder himself and is now an investor. He knows both ways of financing and in an interview with Christoph Jost he shares his tips for entrepreneurs who are considering a VC investment.

Feliks Eyser

Feliks Eyser,
Investor and entrepreneur

Feliks Eyser founded the marketing platform regiohelden.de in 2009, scaled it up and successfully sold the company to Ströer in 2015. Today he is mainly working as an investor with a focus on business angel investments and founding investments.

Christoph Jost

Christoph Jost,
Managing Partner of FLEX Capital

Christoph Jost is a serial entrepreneur and co-founder of FLEX Capital. Among other things, he founded the Absolventa online job exchange and made it the market leader in Germany.

Feliks, if you had to give young founders some advice, when is bootstrapping the right way and when should you finance with venture capital?

Feliks: The way from bootstrapping to venture capital is a one-way street. You have to know that. It's good to start in bootstrapping mode. That's how we did it at RegioHelden. We figured out how the product and sales channels work. We then wanted to expand our sales team from five to 50 people. That would have taken a long time in bootstrapping mode. The VC route was a great shortcut for us. The advantage with it is the speed. The danger is that you raise too much money too quickly and then you don’t spend it smartly. You quickly become addicted to the money. The costs are higher, business success takes longer. Then one round of financing follows the next and you quickly find yourself on a street from which you can no longer get out.

Therefore, from my point of view, it makes sense to start with bootstrapping and look at each individual case whether you need funding to achieve your goals. At RegioHelden we were only able to achieve our goals through VC, but I had to give up 70, 80 percent of my shares. If you can bootstrap, that's always the better way. At the same time, there are business models such as SaaS where bootstrapping is difficult because high investments are required at the beginning.

The VC route was a great shortcut for us. The advantage with it is the speed. The danger is that you raise too much money too quickly and then you don’t spend it smartly. You quickly become addicted to the money.

Feliks Eyser

You founded RegioHelden in 2008, 2009 in a time of crisis. Today we are experiencing a boom, one round of financing chases the next. How do you look at the situation, what should entrepreneurs look out for when starting in a boom?

Feliks: There are advantages to founding a company in a crisis: Marketing costs are lower, there are many employees in the market. Yes, capital was more difficult to come by, but good founders prevail. I see the chance of a boom as we are currently experiencing it in the fact that there is a lot of money on the market. Everyone is interested in the financing rounds in which we support founders. Investors want to write big tickets.

But all that money also leads to competition. More companies are financed than at a time when money is scarce. Good companies are sometimes even overfunded. This not only means a risk of entrepreneurs who have too much money are making unwise decisions. Many go crazy when it comes to the financing rounds. I keep noticing that. In Berlin, as a founder, you read every week about which startups have raised another 200 or 600 million. You then ask yourself why your own company is struggling. The news distorts reality and creates false expectations. Fundraising is always an act of strength.

I recently asked a founder which SaaS multiples, i.e. which annual turnover, he considers realistic. He said: 80 to 100 calculated over the year. I would have said: 10 to 15, 20 to 30 in exceptional cases.

Christoph: And EBITDA also plays a role.

Feliks: Right, you would probably have said: 15 times EBITDA is already expensive and not 100 times sales.

Christoph: Yes, although we are well networked with private equities from the USA and in software companies in the US they talk much more often about sales and ARR and move away from the EBITDA multiple in communication, which has actually always been the linchpin of every private equity. We are therefore adapting to a certain extent, but we still say: The fundamentals must be right.

What is often overlooked by founders and entrepreneurs who want to sell their company: SaaS companies, whose net dollar retention rate is 150 percent, and which are growing by 80 percent year-over-year, rightly trade with high multiples. But many say: “My company is growing by 10, 20 percent. I have now researched that listed SaaS companies in the US are trading at over 30 x ARR - I see myself there too. “It is made more difficult for entrepreneurs in the boom to have a differentiated view. You need a lot of other strong KPIs to justify such multiples.

Feliks: Yes, totally. Many founders want to be rated with SaaS multiples. But they forget that the high multiples come from the fact that the companies can sometimes make 50 percent EBIT margin. However, many founders in e-commerce or car rental have 80 percent cost of goods sold. And just because they have an app doesn't mean they can be rated as highly as tech companies that have extremely high retention rates and high margins.

In Berlin, as a founder, you read every week which startups have raised another 200 or 600 million. You then ask yourself why your own company is struggling. The news distorts reality and creates false expectations.

Felix Eyser

I've seen that in some parts you even run your investment business from Bali. Can you share a few lessons: How well does it work to work from such beautiful places and what difficulties might occur?

Feliks: I was in Bali with my business partner for the last five months and we did our deals entirely from there. For me, this is the most positive Covid effect: It now works to make financing rounds remotely via Zoom calls and to sell companies. A friend just sold his business remotely. That was an eight-figure deal. I have just experienced it myself with a company. We needed three zoom calls. That's it.

We actually only wanted to go to Bali for a month, but then stayed for almost six months because it actually worked so well. Some things are done differently there. For example, I went to the notary in swimming trunks and had to pay cash for the documents, but it works.

The difficulty lies in setting up companies remotely from scratch. We also do company building with partners. It is not enough to look at pitch decks or Excel spreadsheets from a distance. So, it is important to sit together in one room. I think it would work too, but we made classic deals from Bali. Five or six holdings closed. That worked without any problems and I can imagine going to Bali for a few months a year in the future.

I was (...) at the notary in swimming trunks and had to pay cash for the documents, but it works.

Feliks Eyser

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