Berlin is considered the ideal place to be an entrepreneur in Germany. The city has a thriving startup culture and welcomes innovative ideas with open arms. But against many successful entrepreneurs in Berlin, there are hundreds of stories of failure that go around. In order to make entrepreneurial matters clearer for any of our readers who wish to do their own thing in Berlin or even Pakistan, The Academia Magazine talked to Michael Katzman. Katzman works with investment banks and also trains entrepreneurial students for corporate recruiting and startups.
He has had his fair share of successful startups and seen many mature over time. In conversation with The Academia, Katzman sahred some vital ingredients that could well be the difference between success and failure.
What are some of the common mistakes students wanting to start a business for the first time make?
Katzman: Most of the startups in Berlin don’t understand basic finance and lose their business in the first year of their business because they cannot pay attention to their financial statements. It is of key importance to be able to read financial statements or else the market will not have any room for their ideas. Entrepreneurs looking for market share should be able to understand business models and should have a solid financial data to back their claims with.
Some areas that young entrepreneurs need to focus on include risk factor, financial statements, role of banks and liquidity.
What is the risk factor for students willing to have a startup in Berlin?
Katzman: Seven out of 10 startups in Berlin fail, whereas 2/10 would be surviving without making any profit and only 1/10 may go big. That is the picture you are looking at and this 1/10 make enough to attract great ideas from all over the world. That is the risk of being a startup in Berlin. There are many factors that students ignore and willingly don’t pay attention to.
What is the role of banks for supporting a startup?
Katzman: Banks in Germany understand startups quite well, but startups don’t understand banks that well. Banks in Berlin may always ask the entrepreneurs about collateral. Entrepreneurs should know that if you lose your business and are left with debt, how will you get out of it. Banks will not take a risk outside 2% to 6% in Federal Reserve Bank of Germany EZB (European Central Bank). That is what startups can expect from the bank based on their business ideas.
Students must depend on their risk profile for their businesses. But there are not many startups who go to the banks to start their businesses, since they do not believe in starting a business with a loan and that may land them into equity-based business. Small to medium business like restaurant, cleaning etc would generally go for loans from the bank. It is very case specific that startups need to know if they want to start a business based on equity or on debt.
How important is to have liquidity for your business? Do students have a good understanding of liquidity?
Katzman: I have seen so many startups losing their business because they could not control the liquidity (which is the cash flow in a company). Liquidity planning is the most important aspect that startups fail to understand. Students wishing to do their own business must plan for liquidity from day one. Liquidity is divided in time, sum income and sum cost. How much money are you burning is what tells how good or bad you are doing to get the market share, without liquidity you are dead. A lot of startups in Berlin will focus on creativity and less on finances, which is a recipe for failure.
What should students wanting to start a business in Germany be informed of?
Katzman: It should be about the basic economics, do not ignore your cash flow projections; make sure you keep records of all your sales. Once you have done this, make sure you list your cash disbursements as well. If students do not pay attention to these areas in the beginning, they will find it very difficult to have these things placed for them later. There is no software to do this; that is why people continue to fail and accountants will always be in demand. So it’s a win-win for Berlin, if startups don’t make money, accountants will.
What happens if you go bankrupt in Germany?
Germany is not too harsh, the country gives you time to declare your bankruptcy. If you don’t do it during a specific time window, you can be jailed and later, if you earn more than €1,000, you would have to pay back every penny to the government for seven years. But it is also based on the total amount due. Such a situation can be easily avoided if students enter the market with a good knowledge of finance.