Equity to finance an investment project can be provided by a company’s shareholders or external sources such as:

• Business angels
• Venture capital
• Private equity
• Shares sold on the stock exchange

In the early phase, equity is the sole source of financing for an investment project. Even if additional financing options are available, a portion of at least 20 to 30 percent of equity is still required.

Business Angels

Business angels are wealthy individuals, often self-made or with considerable business background and industry expertise, who allocate some of their resources to invest seed money and knowledge in new ventures.

During a company’s seed phase, business angels are often the only source of external financing for a project. For first-time entrepreneurs and young companies, it is almost always easier to raise money from angels than from traditional venture capital firms. This start-up support provides the entrepreneur with enough capital to fund initial product development and sales so that the company can later raise additional capital through other sources.

Often, business angels can also act as mentors by tapping into an extensive, world-wide network to help find customers and other business partners for an investment project.

• German BAND Business Angels Netzwerk Deutschland e.V. (in German only)

Venture Capital

Venture capital (VC) is often needed for the financing of high-tech, high-risk projects. Venture capitalists are willing to get involved in an investment project at a very early phase in order to later sell their stake in an investment for above-average returns.

Investors in VC funds understand that the investments made by venture capitalists run a higher risk of failing than other more conservative investments because young companies rarely have significant assets or revenue history. To take the risk VC companies expect an apparent market potential due to an unique selling proposition covered by intellectual property.

Each VC participation has a limited duration, at the end of which the venture capitalists cash out by selling their shares and thus earning profit with a margin of twenty to thirty percent. If an Initial Public Offering (IPO) is not realistic or promising, the VC company can at least use a trade sale to realize its shares.

Private Equity

Private equity is an appropriate instrument to obtain capital for established and growing companies.

Private equity firms usually concentrate on companies exceeding a sales threshold of EUR 20 million. For deals exceeding EUR 50 million, the market is especially competitive.

Like venture capital companies, private equity companies provide funding to a company for a temporary period (usually three to seven years). The participation of a private equity firm is often ended by a trade sale.

• German Private Equity and Venture Capital Association e.V. (BVK)

Initial Public Offering (IPO)

There are two ways to gain access to capital markets in Germany, and each is accompanied by different levels of transparency. The Regulated Unofficial Market, also called the Open Market (Freiverkehr), offers an appropriate first entry for small or recently founded companies. The Official Market (Amtlicher Markt), governed by EU regulations, requires higher entry, reporting, and transparency standards.

Germany’s most established stock exchange is the Frankfurt Stock Exchange (Frankfurter Wertpapierbörse, FWB), which is the third largest in the world. In addition, there are five regional exchanges which concentrate on local or sector-specific markets:

• Börse Berlin-Bremen
• Börse Stuttgart
• Hamburg & Hanover Stock Exchange (Hamburger Börse)
• Börse München
• Börse Düsseldorf

There is also a commodity exchange in Hannover and a power market in Leipzig.