#External investment vs. self-financing for startups

1. Introduction
   • Understanding the Importance of Investors for Startups
   • Explaining the Significance of Understanding Different Funding Rounds
2. What are Funding Rounds?
   • Overview of Funding Rounds: Pre-Seed, Seed, Series A, B, C, etc.
   • Describing the Differences Between Each Round and Their Associated Goals
   • Comparison Table of Funding Rounds
3. Investors and Funding Rounds
   • Pre-Seed Phase: Goals, Typical Investors, and Funding Amounts
   • Seed Phase: Definition, Milestones, Typical Investors, and Funding Amounts
   • Series A, B, C, etc.: Differences, Roles in Startup Growth, Typical Investors, and Funding Types
4. Impacts on Startups
   • Discussing the Effects of Funding Rounds on Startups: Valuation, Shareholder Structure, and Growth Strategy
   • Challenges and Opportunities Associated with Each Funding Round
5. Challenges and Solutions
   • Mentioning Challenges Associated with Each Funding Round, like Share Dilution and Expectation Management
   • Highlighting Opportunities Resulting from the Right Funding Round, such as Access to Expertise and Resources
6. Conclusion
   • Summarizing Key Points
   • Emphasizing the Importance of Investors for Long-term Startup Success
7. Self-Financing and Advantages
   • Introducing the Concept of Self-Financing and Its Benefits, such as Long-term Independence and Flexibility
   • Discussing the Benefits of Avoiding External Investment, Including Control Over Company Shares
8. Avoiding External Investment
   • Discussing the Potential Problems Associated with External Investors, such as Share Dilution and Loss of Control
   • Emphasizing the Benefits of Independence from Investors and Avoiding Potential Conflicts in Strategic Decision Making
9. Self-Financing and Reinvestment
   • Describing How Startups Can Grow Organically Through Self-Financing and Reinvestment of Profits
   • Emphasizing the Long-term Sustainability of This Approach and Its Impact on Long-term Profitability
10. Challenges and Solutions

• Discussing Challenges Faced by Self-Financed Startups, like Limited Resources and Slower Growth Pace
• Offering Solutions, such as Focus on Efficiency, Agile Growth, Bootstrapping, and Crowdfunding

11. Success Stories and Best Practices

• Showcasing Successful Startups That Have Grown Without External Investors
• Analyzing Their Strategies and Lessons for Other Founders

12. Conclusion
    • Summarizing the Advantages of Self-Financing for Startups
    • Encouraging Founders to Explore Their Own Funding Paths
13. Sources and Resources
    • Providing References to Additional Literature, Case Studies, or Websites for Further Information on Startup Funding and Financing Strategies.

4. Impacts on Startups

Challenges and Opportunities Associated with Each Funding Round

The Due Diligence Phase

Anyone involved in the startup ecosystem or considering investing in young companies will sooner or later encounter a critical concept: due diligence. This examination phase is not only relevant in formats like Shark Tank, but also plays a decisive role in real-world negotiations between founders and investors. But what exactly does it involve?

Definition and Purpose of Due Diligence

The term due diligence originates from Anglo-American business practice and refers to the process of “reasonable care” taken before entering into a financial agreement. In practical terms, it means a comprehensive analysis of a company by a potential investor or buyer before finalizing an investment or acquisition. The aim is to uncover risks, validate opportunities, and verify whether the company’s claims are accurate and complete.

Due diligence typically begins after an initial verbal agreement or a handshake deal. Only after the company’s financials, contracts, legal standing, and future prospects have been thoroughly vetted is the deal formally signed, or withdrawn, if red flags appear.

What Does Due Diligence Involve?

The scope of due diligence depends on the type of business and investment, but generally covers the following core areas:

1. Financial Review

This includes the analysis of revenue streams, cost structures, profit margins, debt levels, cash flow, and financial forecasts. Inaccurate or incomplete financial data is one of the most common reasons for deals to fall apart.
Example: In Shark Tank, several deals collapsed because founders presented inflated valuations based on projections they could not substantiate with real data.

2. Legal Review

Legal due diligence examines pending lawsuits, intellectual property rights, compliance with regulations, and ownership structure. Investors also review existing contracts with customers, employees, and suppliers.
Example: The deal with ISlide (Season 8, Shark Tank) fell through after legal concerns over patents and IP surfaced during due diligence.

3. Tax Review

This involves reviewing tax filings, identifying potential liabilities, and assessing the risk of future audits or penalties.
Example: In some cases, undisclosed tax debts or missing tax documentation have led to investors withdrawing their offers.

4. Operational and Technical Review

This assesses whether the company’s products or services work as claimed, the scalability of the business model, and dependencies on key personnel, suppliers, or infrastructure.
Example: The founders of Vengo Labs secured a deal with Kevin O’Leary and Lori Greiner, but it ultimately fell apart during due diligence because critical business assumptions and projections could not be validated.

5. Market and Competitive Analysis

Investors evaluate market size, growth potential, customer demand, and the company’s competitive position.
Example: Some Shark Tank deals have failed because, during market analysis, investors realized that customer interest or differentiation from competitors was insufficient.

Why Many Shark Tank Deals Fail During the Due Diligence Phase

Many deals that initially appear successful on the TV show Shark Tank later fall apart during the due diligence phase. Estimates suggest that roughly half of the investments agreed upon on the show are never finalized. The reasons are varied and range from insufficient preparation to deeper structural issues within the companies.

Common Reasons Deals Fail During Due Diligence

• Incomplete or inaccurate financial data: Many startups struggle to present clean bookkeeping or reliable financial metrics.
• Legal and tax uncertainties: Unclear ownership structures, pending lawsuits, or outstanding tax liabilities often deter investors.
• Product flaws or quality issues: Products that seemed impressive on camera may later prove to be underdeveloped or defective.
• Unclear business models: Lack of scalability or vague monetization strategies raise concerns about long-term viability.
• Internal conflicts: Disagreements among founders or between founders and investors can prevent a deal from closing.

Examples of Deals That Fell Through

Here are some notable examples of startups whose deals did not materialize after their Shark Tank appearance:

• Biem Butter Sprayer: Despite securing a deal with Lori Greiner, the company struggled with product issues and insufficient funding.
  Source: GeeksAroundGlobe
• The Natural Grip: Although a deal was made with Robert Herjavec, the company failed to generate sufficient revenue and eventually shut down.
  Source: sharktanksite.com
• RoloDoc: This app for doctor-patient communication was deemed underdeveloped and did not receive an investment.
  Source: GeeksAroundGlobe
• Toygaroo: Marketed as the “Netflix for toys”, the company was unable to cover operating costs and filed for bankruptcy.
• Breathometer: The startup was sanctioned by the FTC for misleading advertising and had to cease operations.
• ShowNo Towels: Despite a deal with Lori Greiner, disagreements and disappointing sales led to its collapse.
  Source: The Things, The VIP Roll, Techie + Gamers
• Sweet Ballz: Internal disputes between founders led to the company’s dissolution.
  Source: You Smell Soap, The Things
• You Smell Soap: The deal with Robert Herjavec never closed. The business was later sold and shut down.
  Source: epirus.vc, sharktanksite.com
• Plated: A deal with Mark Cuban was initially agreed upon but never finalized. The company was later acquired by Albertsons.
  Source: Wikipedia, Techie + Gamers
• Hy-Conn: The deal with Mark Cuban failed due to disagreements over business management.

These examples clearly illustrate how crucial thorough preparation and transparent communication are when trying to convince investors and close a deal successfully.

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Recommended Reading on Due Diligence

Here are some valuable resources for founders and investors who want to better prepare for the due diligence process:

• Due Diligence in der Praxis
  A comprehensive German-language guide covering all aspects of due diligence.
  Price: €74.99 (Thalia.de)
• Praxishandbuch Operational Due Diligence – Frank Höhne
  A hands-on manual focusing on operational due diligence procedures.
  Price: €74.99 (Amazon.de and other retailers)
• Erfolgsfaktor Due Diligence Prüfung – by Georg Eder
  A compact reference for conducting successful due diligence reviews.
  Price: €42.00 (Thalia.de and others)
• Die Durchführung von Due-Diligence-Prüfungen – by Florentin Rack
  An eBook version ideal for digital reading and on-the-go learning.
  Price: €18.95 (medimops.de and others)

These resources provide founders and investors with the knowledge and tools needed to navigate the due diligence phase successfully.

Deal or No Deal?

The due diligence phase is an essential tool for systematically evaluating companies in the context of investment or transaction processes. Its purpose is to identify financial, legal, tax, and operational risks and to provide a foundation for well-informed decision-making.

For founders, it means presenting all relevant company data in a structured, complete, and transparent manner. For investors, it ensures that the assumptions made during preliminary discussions are reliable and that the investment is built on a solid foundation.

Whether a deal ultimately goes through is often determined during this phase – not at the negotiation table, but deep within the numbers, contracts, and business processes.

Tip for Founders: Early Preparation for Due Diligence

A well-structured and thoroughly documented preparation for the due diligence phase can be a decisive factor in whether a deal goes through or falls apart. That is why it is advisable to build key areas cleanly and auditably from an early stage in your company’s development:

Ensure Financial Transparency

• Maintain professional bookkeeping (ideally with the support of a tax advisor or CFO).
• Prepare complete and traceable annual financial statements, profit and loss statements, balance sheets, and cash flow analyses.
• Keep all relevant KPIs (e.g., customer acquisition cost, retention rate, revenue growth) up to date and backed by evidence.

Document Legal Structures

• Keep all incorporation and shareholder agreements current and legally sound.
• Clearly document ownership structures, capital increases, convertible loans, and other relevant corporate actions.
• Collect all contracts with customers, suppliers, partners, and service providers in a centralized data room.

Ensure Tax Compliance

• Provide complete tax returns, official notices, and proof of tax payments.
• Clarify any outstanding tax issues early to avoid future risks.

Structure Operational Processes and IP Clearly

• Document your internal workflows, organizational structure, and IT systems.
• Secure intellectual property (patents, trademarks, software code) legally and document ownership unambiguously.

Prepare a Data Room

• Set up a digital data room early, where all relevant documents are organized and easily accessible. This simplifies the review process for investors and creates a strong professional impression.

Takeaway:
The more structured a company is when entering due diligence, the smoother and faster the review process will be, and the greater the likelihood that an investor will gain confidence and finalize the deal. Careful preparation is not extra work, it is a strategic investment in your company’s fundability.

10. Challenges and Solutions

Slow is smooth and smooth is fast

The saying “Slow is smooth and smooth is fast” is a popular mantra used in various fields such as the military, sports, and business. While it’s often attributed to Jeff Bezos, it’s actually a common phrase used by many people in different contexts.

The meaning of the saying is that by taking things slowly and smoothly, you can achieve your goals more quickly and efficiently than if you rush and try to do things too quickly. By taking your time to plan and execute each step with precision and care, you can avoid mistakes and setbacks that might otherwise slow you down.

In other words, the saying suggests that there is a balance between going fast and going slow, and that finding that balance is key to achieving success. By focusing on being smooth and deliberate in your actions, you can maintain that balance and accomplish your goals more effectively than if you simply try to go as fast as possible.