Reading: Financing and Firm Life Cycle

Initial equity usually comes from own savings, part-time jobs of the founders, and the famous 3Fs, the family, friends, and fools. The basis of the investment decision is usually a personal relationship and faith in the founders, as the project itself has little if any track record and there is too much uncertainty around the key dimensions of the business case to make a sound investment decision. 
 

• The typical strategy is to avoid fixed costs and to try and pay as little as possible for the resources it takes to start the business (for example, work out of a coffee shop or the parent's garage instead of renting offices in a prime location, pay minimum salaries instead of market rates, etc.).
   
• Spending money diligently is often the only way for founders to preserve their equity. The reason is very simple: Because of the very risky nature of the venture, outside financing is generally very expensive, so that founders have to give away a comparatively large ownership stake in exchange for comparatively little money. 
   
• There are also countless organizations that award grants and subsidies (e.g., free office space) to new ventures. This is an extremely valuable source of financing, as they are often non-refundable (à fonds perdu) and therefore get as close to free money as possible. 
   
• Moreover, by participating in business networks or teaming up with an incubator, entrepreneurs can gain access to indispensable business, technology, and market knowledge without having to pay steep consulting fees. Such an active exchange with peers and subject matter experts also has the benefit that entrepreneurs can learn quickly and avoid many mistakes.