startup funding explained | how to raise capital for business?


there are many reasons why companies
look for capital those companies can be startups established companies or not
even companies yet but just business projects they can be online or
brick-and-mortar companies they can be technology companies or more traditional
ones but the one thing that those companies share is the fact that they’re
trying to achieve something and they need capital to achieve it that
something is usually a self-contained project or in other words a project that
is specific in nature and that is time-bound
for example the development and launch of a product is a self-contained project
that could require capital that the company does not have the company
therefore has either the choice of waiting until it has enough money to
develop and launch the product or to look for capital in order to do the
development and launch as soon as possible some projects can wait to be
started when you have the money and other projects simply need to be started
as soon as possible before the opportunity disappears for a business
project although it looks like it could be different even that the company
doesn’t exist yet it is pretty much the same thing a business project is a
company that has not started yet and has its founder as its one and only employee
it usually needs to develop and launch its first product and to do that it just
needs more things than an established company already has such as office space
or employees in essence a new product in the new business is pretty much the same
when it comes to raising capital some of the reasons companies raise capital are
the development and launch of a product that requires significant funds upfront
a good example would be if you decide to develop a new product then need to
produce a certain quantity of it and store it until it is sold the cost of
all those steps can add up to a significant amount and therefore
requiring you to raise capital or to overcome a significant barrier to entry
in a market this can for example be seen in the biotech or pharmaceutical
industries where you need to do a lot of research before you get to a product
that can be solved and even then that product needs to go through many types
of approvals and certifications before it can be put on the market or also the
need to grow the company at a very fast pace to gain a strategic benefit from
being the market leader let’s take for example a company that sells a product
to the banking industry then the company has a quite low number of customers it
can sell to once its product is ready for launch
the company could need capital in order to put together a sales team that can
take over the market as fast as possible before the competition gets in the
benefit here would be to build a stronghold that would be very difficult
to take over for any given competitor you need though to be careful to always
have a time bound element to the reason you’re raising capital even if the
deadline is very far in the future an error sometimes made by entrepreneurs is
to build a company that requires regular injections of cash in order to survive a
key element to the success of business is ultimately to be profitable and
self-sustaining which means that once the project for
which you’re raising capital is delivered then your company should be
able to continue to thrive on its own there is no one strategy to raising
capital there are many strategies and each one of them is unique to your
personality your business and the stage of development your companies in if you
read the business news you might be used to seeing a lot of articles about
venture capitalists investing millions of dollars into businesses but venture
capital is but a part of the capital investment landscape there are many
other sources of capital and each has its set of benefits and limitations but
first it all starts with you as an entrepreneur for example how easily can
you share information about your company with the outside world without being
afraid of having your idea stolen some of the strategies out there involve a
fair amount of information sharing with potential investors to be able to tap
into those sources of capital you need to share your vision why you believe
your business is going to succeed and your business model which in other terms
means how you’re going to make money we have a tendency to overrate the risks we
face by sharing our business ideas but nonetheless you have to assess how
comfortable you are with sharing vital information about your business if this
is a big no-no for you then you need to build your strategy using sources of
capital that allow you to share little to no information about your business
then the type of business you will be running makes a big difference as well
if you’re looking to start an online business your funding needs will be much
lower than if it’s a brick and mortar business online businesses require very
little capital when compared to the relatively limitless return it can
provide if on the contrary you’re looking to open a shop you’re going to
have significant upfront investments to make and will therefore have to tap into
more sources of capital if you start a consulting firm which is pretty much a
business around your main competency that can be started as soon as you have
business cards in a computer for that type of business you might actually not
even need any funding and the sole investor is going to be you if on the
contrary you decide to manufacture product and
sell them online or through distributors then you will have to secure enough
capital to get the initial inventory and store it somewhere there are many
different types of sources of capital out there and depending on what type of
entrepreneur you are or business you’re in and at what stage of development your
company is in you’ll see that there are a number of paths you can take there’s
no right or wrong answer to how to raise capital for your business but there are
better fits depending on your unique situation when it comes to sharing our ideas with
other people many of us have the tendency to overrate
the true risk of doing so when I have a good idea I have the reflex of wanting
to keep it to myself as if I was taking the risk of losing it to a potential
competitor just by talking about it in reality there are very little chances of
that happening and for very logical reasons of course I’m not saying that
you should tell everyone about your idea just because there’s very little risk of
it being stolen but nonetheless there is no reason to keep it only to yourself to
the point of hindering your development efforts first it takes a big even a
massive effort to start a new business and out of all the people who happen to
have a good business idea or hear of one for that matter only a tiny portion will
actually think about doing something about it maybe only 1% and out of that
1% maybe just another 1% will actually do something about it
so if we quickly do the math here that means that only one person in 10,000 you
are going to be telling it to could actually do something about it which
means that if you talk about your plans within your circle of friends or to your
family the probability of each resulting in someone stealing your idea is very
close to zero my conclusion here is that there is no true reason to hold back and
not share with your friends and family about what you’re trying to achieve then
you could tell me that you will talk about your project to potential
investors who have the means to steal your idea and actually are looking for
ideas here again I don’t think this is a true representation of how things work
investors are actually not looking for ideas investors want to invest in
businesses that have the idea and have demonstrated their ability to turn the
investors money into ten times what it’s worth if you see a great entrepreneur
coming with a great idea why would you go through the trouble of finding
entrepreneur to do the same thing isn’t that a pure waste of time if you need
investments do share your ideas and business plan with investors and by the
way we don’t hear so much about investors putting together teams or
businesses around an idea the simple reason is that this is actually the job
of the entrepreneur himself not the investor when someone is an investor
that means he wants to see the whole package not just the idea third even if
you were to tell your idea to that one person in 10,000 or that to that
one-of-a-kind investor who wants to steal your idea then what’s the worst
thing that could happen you’ll just have a competitor in front of you once your
business is thriving you’ll attract the eyes of many individuals and companies
that will want to get a slice of your market competitors will pop up all
around you and only the fittest will survive so what difference does it make
that you get that first competitor a bit earlier than anticipated we all tend to
not talk about our business idea because we want to be the first to hit the
market but being the first to market is barely an advantage okay you might get a
few more sales at the beginning because you’re the first to offer that product
or service but very quickly as competitors join you in offering that
product or service you will most likely have no benefit left from having been
the first even worse being the first is sometimes a big risk as you invest a lot
of money on an idea that has not been tested yet for which the market could
not be ready some of us just have the vision a bit too early and take a bigger
risk of failing and in that case being the second one or actually the third one
in the market is actually sometimes an advantage because you get to see what
your competitors are doing right or wrong while I’m not saying that you
should walk around with a sign on your back explaining your business model I
don’t think either that you should hold back from sharing it with investors or
telling your friends and family about it raising capital takes time not an
infinite amount of time but it usually takes a few months between the time that
you put together your business plan define your capital search strategy
start meeting with potential investors secure the deal and get the funds it can
easily take six to nine months what that means is that if your business needs
that capital to start its operations you’d better think twice before you quit
what you’re doing now at least until you know in approximately you’ll get the
funds it also means that raising capital is rarely the solution to solve an
urgent problem if you need capital right away to save your business or to start
it fast to solve a personal situation then you’d better look for other options
that yield more immediate results in order to raise capital successfully I
think it’s important to understand who investors are and what they’re looking
for when they review business plans I of course won’t be trying here to give you
a one-line description that will cover all the types of investors given that
each person is unique and has his or her own objectives in way of thinking there
are though common traits to many of them which every entrepreneur would be wise
to take into consideration the first thing is that despite what people
usually think most investors are all wearing successful entrepreneurs or had
a very high profile job in a large organization many of them have been in
your shoes starting projects raising capital and they know exactly what
you’re going through they also know what it takes to being a successful
entrepreneur they also have seen their share of businesses that failed in our
area of business plans that are too optimistic enough entrepreneurs who are
too confident and not ready to hear their feedback their feedback is very
valuable because investors usually have a great deal of experience starting a
business and raising funds you should definitely hear what they
have to say you could be saving tons of time and blunders by listening to and
implementing their feedback there is one thing they all have in common they
invest in your business to make money which means getting more money down the
road that they have invested at the beginning and they will not be looking
only at your revenue projection which will surely be optimistic but also at
what you are going to spend the money on and when you spend it because those are
elements of your business that you can play with and secure and maximize return
on investment investors all have their unique characteristics and goals but
remember to keep the investors point of view in mind as you’re pitching your
project or idea to them you before you even start meeting with
investors you need to have the answer to this key question how much capital do I
actually need to answer that question you actually need to have a very good
understanding of how your company is going to make money how it’s going to
acquire and retain customers how much upfront investment is required how much
day-to-day expenses you’ll have any investments you need to make along the
way how fast you start seeing your first dollar coming in and last how long will
it take for your customers to pay you once you made those cells with answers
to those questions and some simple math you should be able to come up with an
answer one thing you need to keep in mind though is that you’re going to need
much more than your initial investment apart from the original investment there
are two things that weighed heavily on your capital needs the first one is the
salaries you have to pay including yours and the second one is the time it will
take to sign your first customer and get paid if you already have a customer
that’s a great way forward and a great way to reduce your capital needs there are four big sources of capital
within which we can fold all the usual sources we know such as crowdfunding
venture capital business angels loans and so on those sources are the
following your own money when you’re coming from the operations of your
company debt and equity let’s look at each one of those in detail let’s start
with your own money the first question we need to answer is why are we talking
about your money when in the first place you’re following this course to
understand what other sources of money there are there are three reasons why we
need to talk about your money the first reason is that we talk about your money
we talk about any money you can get through your own means or can get from
your family so in that sense it is money that you will have to ask for just as
you would do with investors you don’t know the second reason is that you have
to put your money into the project if you want to have credibility when
meeting with investors if you don’t put your money into your project then how
can you expect anyone else to put any money as well how can you convince
anyone if you have not convinced yourself the third reason is that many
entrepreneurs don’t pay themselves for a few months and when they can afford it
it can even last for more than a year and in essence since they have to pay
their personal expenses with their savings for example you can consider
that it’s just the same as investing money into the company and using it as a
salary so if you work for your own company and don’t pay yourself any
salary or just a very small one and need to compensate with your savings for
example then you can consider your investing money into your business
another great source of capital is the operations of your company in short if
your company generates a profit you can use that profit to fund your business
and therefore need less money from outside investors many entrepreneurs
start their company when they found their first customer and can therefore
dramatically reduce their capital needs so the key idea is to keep in mind here
that the earlier you’re calm he turns a profit and the less capital
you will need next in line are deaths usually people don’t like to have deaths
but for a company when you can afford it it’s a great way to find capital without
having investors interfering with their business decisions contrary to the
equity option that we will see in a minute with that it’s just like the
regular loan you can get for your personal needs you know up front how
much you get and how much you will pay back therefore there are no surprises
the downside is that you’ll have to start paying back from almost day one
which will weigh heavily on your finances so the more you’ll rely on debt
the more you have to generate revenue fast and in sufficient quantity to pay
those monthly repayments the last big source of capital is equity equity means
selling share from your company me in exchange for the capital you are looking
for you could for example sell 40% of your shares for $1,000,000 you would
then have the million dollars you need and will remain the owner of 60% of your
company the upside here is that there is no monthly repayment and the investor is
in the project with you for good or bad the downside is that since the investor
is looking to make a big return on his investment he will be participating to
the decisions you make at least the key ones and will have a say in your
strategic choices the other downside is that you don’t know in advance how much
money you will pay back for that investor money the investor himself will
be entitled to a portion of your profits and down the road it could add up to
much more than you originally received from him so you’d better be sure that
this money is really needed and that you are really getting a great deal you’ll
also want to make sure you have tried every other option before resorting to
giving away your shares depending on your specific situation you’ll have to
consider tapping into one or more of those sources of capital deciding which
one to use and when is strategy you have to define one thing you could wonder and
rightfully so is to know if you’re better off raising
all the capital you need in one go or doing it step by step
let me guess once would be better of course most people would think that
let’s imagine you’ve prepared your business plan and you know you need a
hundred thousand dollars to start your business then it just sounds logical to
find that amount and if you get it now it’s even better since you’ll didn’t be
able to focus on your business and not raising capital every other week the
only thing here is not only do investors prefer to invest step by step but it’s
actually better for you let’s take the example of raising capital through
equity or in other words the sale of shares of your company since you are
selling shares of your company then the higher the price of your shares and the
more money you will get same differently the higher the price of your shares and
the less shares you have to give away for the amount of capital you are
looking to raise so the higher price of your shares and the better off you are
if your company is successful which you definitely should be planning on then as
time will pass the value of your company will increase and therefore the value of
your shares will increase as well so technically the more you wait before
raising capital through equity and the better deal you’re getting the only
problem is that sometimes you need money right away to get started so instead of
asking for all the money you need maybe you should ask only for a portion of it
which will get you to give away less shares and will give you the time you
need to raise the value of your company and sell some more shares but much less
than with the other raising all at once plan so potentially instead of raising 1
million dollars with 40% of your shares you could raise half a million dollars
with 20% and later on another half a million with only 10% or maybe even 5%
so in the end getting the same 1 million dollars for 25%
your shares instead of 40 let me tell you why investors prefer to do it by
step as well first and as we’ll see later on some investors specialize in
certain maturity levels for companies some investors do seed investing which
focuses on real startups that are barely starting some in the development of
startups that have proven that they have a profitable and sustainable business
model so some investors will be interested to do only a portion of the
way with you and offering them the opportunity to invest in a single step
will open more doors for you another reason is that your company will grow by
stages for example there could be a product development phase which might
not even generate any revenue and will focus on putting a product on the market
then it could be followed by a sales phase focused on getting a certain
number of customers and becoming profitable the third step could be a
marketing one with a focus on getting the world to recognize you so that at
least some of the cells come from people or companies wanting to work with you
some investors will be interested to work with you on only one of those
phases and sometimes bring with their capital their skills and the network
which will help you grow the company in short investors like to invest by steps
and they call those steps milestones there’s a common sequence of events to
finding the capital you need for your cup company I mean after you have
evaluated how much money you need and that you’ve done everything you could to
make it the smallest amount possible the common sequence is the following first
fund as much as possible with your own money second get as much loan money as
your company can afford to carry third get the rest of the capital you need
through equity or in other words the sale of shares the logic behind the
sequence of events is that as an entrepreneur you’re interested in
maintaining as much as possible control and ownership of your company as any
entrepreneur in his right mind when you have an awesome project that you know
you’ll be successful you’d rather split the profits with as
few people as possible that logic means that you would want to
investigate every possible way to get the capital you need without sharing the
ownership of the company at all if possible and as little as possible if
there’s no other choice of course in your particular situation you could
consider that it’s well worth giving away a large portion of the ownership
but you will be likely to reach that conclusion once you have done everything
you can not to do it and ultimately decide to do so because that’s the most
probable way of being successful at raising the capital you need and get
your project going so the sequence first starts with your own money
and that includes any money that you won’t have to give back at all it
includes any savings you have any money giving to you by family members for
example the second step then is to secure one or more loans the great thing
about loans is that you know from the beginning how much is going to cost you
and for how long no one is going to interfere in your day-to-day management
of the company the downside to loans is that you
usually need to start repaying right away and that creates an obligation for
your company from day one you therefore need to grow your business as fast as
possible to have the means to pay those loans once you have exhausted
all of the above you’re pretty much left with finding investors those can come in
many forms such as venture capitalists or business NGOs for example they will
lend you money and you won’t have to repay a dime in the short term but the
flipside is that they now own a piece of the company as well
and you’d therefore have to report back to them regularly agree with them on key
decisions and of course split the profits once you have some this is the
reason why it usually comes as the last option rare are those entrepreneurs who
are looking to have a boss a central element to the entire process
of raising capital is having a business plan to present to investors so let’s
quickly go over what a business plan is and what it should include this is a
very large topic and not just present briefly what a business plan contains a
business plan is a document that you can either share in printed version or
electronically which provides not only an overview of your business but all the
elements required for someone completely external to your business to be able to
understand it it’s a complete overview of your business both from the inside
and the outside the inside of course is about you and your team your product and
services your strengths and weaknesses your strategy and your ambitions from
the outside it’s the market you’re in what your customers need what problems
they have and that you’re going to solve it’s also who your competitors are what
they’re offering and how they answer to the problems you’re trying to solve if
they actually do there are sections that are common to all business plans and
those are an executive summary which is a two pages max document that is very
well written and sums up all the key elements of your business but more
important who creates the excitement of investors so that they want to get in
contact with you to get you to present your business in more detail investors
usually first review executive summaries before they ask for a complete business
plan a company description which explains who your company is what it
stands for and where it is on the path to its mission is it still just a
project on paper or have you started are you alone or with the team have you
started doing real business you need to bring the investor here up to speed on
where you are with this company you also need a market analysis let’s be clear on
what the market is the market is where customers and companies meet and is
material by the sale of products and services you
can represent the market with words by describing the profile of your customers
are they teenagers in the workforce senior citizens a minority who your
competitors are are they proposing low-end products or high-end ones are
they selling another version of your product or an alternative product such
as tea for example when you compare it to coffee and it can be represented in
numbers through the total number of dollars spent by customers over a full
year buying that product you could be targeting for example a 1 billion dollar
market which would mean that over a full year all of the people who buy your
product or a similar product have spent together 1 billion dollars then describe
the product or service you’re going to offer what problem it solves why
customers will need it how is it different from what already exists once
you have covered all of those elements comes the time to talk about yourself
and your team who you are what skills you have why you will be the right
person to make this project successful ideally be able to show that you’re not
doing this for the first time but if you are what shows that you will be
successful at it then you’ll have to present yourselves and marketing
strategy while concrete actions you will be taking to make things happen and
ignite sales and show that you won’t be waiting for customers to come in and
last a business projection showing the financial impact of your entire plan
which by the way will have to show why you need the money you’re trying to
raise in any case preparing a business plan has many virtues it will help you
define the building blocks of your plan and assess what it takes to be
successful you should prepare it just as much for yourself as for the purpose of
raising capital it actually is the first step of your journey you in this course and when you are raising
capital in general you’ll be talking nonstop about the value of your company
this is a critical element of raising capital and especially when you’re
raising capital with equity when doing so you are in short selling shares of
your company in exchange for the capital you need by doing so you therefore are
left with less shares and are not anymore the only owner of the company
for example you could be raising $1,000,000 for 35% of your shares that
would mean that after you successfully raised those 1 million dollars you will
be earning 100% minus 35% of the company or in other words we’ll be left with 65%
of your company and your investor will own 35% of the company the big question
then is how many shares would you be giving for the money you want and that
question is answered with the valuation of your company once you and the
investor agree on the value of your company then you know the value of 100%
of your shares if you divide it by 100 then you know the value of 1%
if for example you agree that your company is worth $1,000,000 then if you
divide it by 100 then you know that 1% of your company is worth $10,000 in that
case if you need to raise $100,000 then all you need to do is give away as many
percentages as needed until you get to that amount in this particular example
you need to give 10% so the more your company is worth and the more shares you
keep and the process of estimating the value of your company is called the
valuation of your company so everyone is interested in the valuation of your
company and the entrepreneur you and the investor need to agree on the value
there is no one way to value a company there are many ways and everyone has a
different opinion on the best way to do it so be ready to negotiate exchange of
pin verify numbers because that’s going to
take some time as you might guess it’s in the best interest of the entrepreneur
to have a high value for his company and in the interest of the investor to value
it low at the end this needs to be a win-win so it’s important to debate and
find a value for the company that seems realistic for both the entrepreneur and
the investor my stuns are another big thing
that you need to put in place in your plan it is critical to the process of
raising capital but on top of that it’s an excellent way to manage the
development of your company the concept of milestones is to break down the
development of your company let’s say for example the next three to five years
in two phases and the end of each of those phases will be one of your
milestones for example if you have a software company then you could imagine
that the phases could be phase one getting the basics together to start the
company during which you would define how your company will operate in its
earliest stage how you will test your market and get the elements you need to
determine that it’s worth your while to dive into the project the end of that
phase is your first milestone phase two would be product development in that
phase you will focus all your efforts and those of your team if you have one
on the development of a version of the software that is advanced enough that we
can hit the market it doesn’t mean that you’re not doing all the smaller things
that need to happen within your company but the big thing of the moment is
getting your software ready the end of that phase is your second milestone
phase 3 would be sales and marketing plan now that you have the basics
together you have a software or an app to sell you should definitely have a
strong plan to get people to buy it to get excited about this talk about it and
make it financially successful the end of that phase is your third milestone in
this example there are three phases in three milestones the reason why phases
and milestones are so important to raising capital is that it will enable
you to raise capital to fund those phases one by one by splitting the
company’s development into phases ended by milestones you actually package
your company and its development in a way in to individual companies that help
investors know when he is supposed to exit and sell his shares to potentially
another investor who will fund the next phase
and therefore the milestone is the time at which the investor is expecting to
sell his or her share so break down your plan into milestones so that you can be
specific with your investors about what they’re funding with their capital how
it will change the value of the company and what is the exact time at which they
will have the opportunity to exit this investment opportunity you in this course we will talk a lot
equity and it’s important to understand the difference that is simply what you
know it is is borrowing money from an individual or an institution and pay
back that amount with interest once the loan is paid back you and the lender can
each go your own way and never meet again no strings attached it’s a way of
course to raise capital since raising capital
despite the fancy name is just about getting the money you need to be able to
do the things you need to be done equity is quite a different way to raise
capital in this case you get money all the same from people or institutions
which are giving in exchange a portion of your shares and therefore a portion
of the ownership of the company the immediate upside is that there is
nothing to pay back not now not later but the flipside is that your new
business partner can have a say in the management of the company and get a
share of the profits all in all it can be much more costly than alone since you
hopefully will make a lot of profits which you will have to share there is no
limit to the profits you will be sharing whether it is $1 or $1,000,000 or even
more the investor will get a percentage of it all the same there are upsides
though to this such as getting a business partner or a mentor someone who
will bring advice and his network and even potentially customers based on the
percentage of the company he owns he will have a smaller or bigger say into
the company decisions someone owning only 10% of the company will not have
much of a say or any ability to make decisions but if that person has 50% of
the company this person can pretty much decide what the company will be doing
the only way to part with an investor is if he sells his shares back to you or to
another investor another important note is that when you sell shares to investor
to get capital you can define what those shares
and titled the investor to do this is for example important when selling
shares to someone close to you such as friend or family those are
people who might not necessarily bring the advice and mentorship Network and
customers you would expect from regular investors along with the money they give
you you can therefore seldom shares that give no voting rights which means that
they can claim a portion of the profits of the company as every other investor
but will have no way to make decisions for the company or participate in its
strategy other than trying to convince you to do something a great thing with
equity is that you can do a lot of things with it and define exactly what
the investor is entitled to but on befouled investors know exactly what
they should be getting so you need to be just as savvy on the subject using your own money such as savings to
fund your company or project is the first and foremost plain and simple most
logical way to start raising capital you raise your own capital you should like
that option because it will first be a great way for you to get a much better
return on investment than any other investment out there it’s a great way to
start your company without sharing any of the control and ownership of the
company just yet and for investors it’s a way to show
that you believe in yourself and in your company and that you are not afraid to
bet on yourself on the opposite side if you manage to get in front of investors
without having invested a single dollar on your project then those investors
will rightfully question why they should invest in your project if even you are
not willing to do so or worse that you have not been able to save a few
thousand dollars to get it started putting your own money into your company
is a sign to everyone that you believe in what you’re doing that includes your
savings and any money that you can get from your family for example to help you
start your business it is in short any money that you can get that you won’t
have to repay in this video we will review two options
available to many people which put your personal well-being and the well-being
of your relatives in danger but which still are part of the capital landscape
and therefore deserve to be described at least for completeness the first one is
about maxing out your credit cards to get the capital you need I might not
even need to explain the concept here of using your credit card to pay for
everything you need to get your company started those loans usually carry very
high interest rates and are long and difficult to repay if things don’t go as
planned and you need more time than expected to sign your first customer or
if customers take more time than expected to pay you for your services
then those loans will put a lot of pressure on you very fast and in
addition to worrying about how to sign more customers you’ll be splitting your
time between getting your company going and finding ways to pay back your loan
you could be putting your credit rating at risk as well with all the
consequences that come with it the second one is called a home equity loan
this is a loan that you can get if you own your home and have paid back a
portion of the loan depending on the value of your home and the amount that’s
actually left to repay the bank could be inclined to grant you another loan
called a home equity loan in for example your home is currently worth $100,000
and that you have $60,000 left to repay then you should be able to get a loan
for up to 90 percent of the difference between the two and in this particular
example you could get more than $30,000 to invest in your business the downside
of this loan is that if you fail to repay your loan you could lose your home
there are many safer ways to raise money which we will be reviewing together in
this course you so what is crowdfunding crowdfunding as
its name States is a way to raise capital for your company through a large
number of investors that’s very different from the traditional way of
raising money which is done through a small number of wealthy investors or a
venture capital firm individually each investor called in this case a backer
will invest a relatively small amount of money but collectively it can represent
tens of thousands of dollars or even hundreds of thousands of dollars in this
case investors are called backers because they’re actually not investors
in the case of crowdfunding at the moment of this recording people that
want to put money on your project cannot do it as investors for legal reasons and
have to make donations instead which are usually rewarded by a gift or a limited
edition product entrepreneurs and backers meet on funding platforms which
are websites dedicated to putting in contact potential backers with
entrepreneurs some of the most widely used web sites are Kickstarter calm and
IndieGoGo calm on those web sites you can create a project profile which you
will use to market your company and product with the objective of attracting
backers and motivating them into giving you the capital to make your project a
reality there have been some huge successes in the field of crowdfunding
and one of the most well-known is the people ePaper watch this is the story of
an entrepreneur who needed to raise $100,000 and ended up getting 10 million
dollars from backers on Kickstarter of course that’s an extreme example of what
can happen when you raise capital using crowdfunding but it’s also an example
that it can be very successful and get to the capital you need and as we will
see crowdfunding is best serving very young companies that have a limited
connection to the investment world you one of the first ways people usually
consider to raise money is to turn to their friends and family to lend them
the capital they need to start their company it often sounds like a great
idea because those people are easily accessible and want to see a happy and
successful but the nature of the relationship itself and the fact that
those people are so close to you is actually what makes it the most
dangerous ways to raise money when you raise funds through professional
investors everyone knows what the stakes are what the potential upside is and of
course the hard reality that 80% of all startups fail eventually and that there
is a very real risk of losing your entire capital and friends and family it
is actually quite different their motivation to invest in your business is
actually related to the fact that they want you to succeed or to send you the
message that they believe in you and want to support you in your
entrepreneurial efforts they might even be reluctant to give you their opinion
if it’s negative so as not to demotivate you or have you thinking that they’re
not supporting you usually it even goes one step further which is that friends
and family can be reluctant to do any paperwork to formalize your agreement
when you’re in that first phase where everything is still possible everyone is
very happy you’re getting the money and your friends and family are happy to
help you but usually things get complicated further down the road
the question is what happens if your company meets difficulties and you’re
not able to repay the loan is that going to be an issue if your company files for
bankruptcy do you expect to repay the loan anyway those are all questions that
need to be answered upfront when you’re dealing with an institution all of those
things are set in stone as soon as you sign the contract you know who is
responsible for the loan what will happen if you miss a payment and the
full consequences of not being able to repay the loan with friends and family
you need to have the same level of rigor in the borrowing process and define all
those things the benefit of doing so is that if things do turn sour then there
is no relationship or family issues added on top since it will all have been
defined in advance for example if you’re having temporary difficulties you need
to define how you will handle it will you stop the monthly payment for a time
until your finances are better is your lender okay with that and does he have
the financial stability required to live without that money if your company files
for bankruptcy will you be repaying the loan or not and if so would it be okay
for your lender to wait until you have a new source of income to repay the loan
will they accept a smaller monthly payment over a longer period of time and
even if you do remember that those people are your friends and family and
they might therefore have an opinion on how you use your money for example they
could be okay to reduce your monthly burden and take it on themselves to let
you repay the loan over a longer period of time but they might also feel bad if
they see you going out or on vacation instead of paying them in an accelerated
way you of course might feel like this is a well deserved night out or vacation
but chances are they will see it in a very different light they might feel
like they’re financing your vacation those are things you need to take into
consideration when borrowing money from friends and family getting the money is
usually the easy part but the consequences down the road can be
terrible so what’s the best way to borrow money from friends and family
first you need to treat them like strangers as far as paperwork is
concerned don’t fall into the trap of believing that oral agreements are
sufficient just because you know each other then protect their interests
better than they will as I said earlier they will not want to protect their own
interests so as not to lead you to believe they mistrust you so you have to
do the job and in cyst on putting everything on paper go
over every possible outcome and then put in writing the way you will manage it it
is so important that I will say it again put everything in writing don’t rely on
your memory or theirs to know what was originally said and by the way even if
we all had good memories we also all have different interpretations of what
we say putting things in writing helps a lot in clarifying the agreement even if
that document might not have a legal value it will be a great way to preserve
your relationships borrowing money from friends and family is a dangerous game
if you must do it to get started or if there is no other way to get your
company on its way then do it but put it all in writing and defend the interests
of your friends and family as your own in this video we will be covering two
have Investor dead-straight debt and convertible debt straight that is the
basic loan that you and I are used to getting for our personal needs the money
you borrow is to be repaid over a certain period of time or at the end of
the period with a certain level of interest rate that’s a great way to get
capital easily and if your company has a certain level of revenue and is looking
for capital in order to launch a new product or start operations in a
different state or country for startups this type of loan is usually accessible
only if you’re personally responsible for the loan and repay it even if your
company fails otherwise banks are usually reluctant to lend money to
startups given the high level of risk banks tend to prefer safer investments
with a very very low probability of default for startups the best way to get
a straight loan is to borrow from friends and family but we’ve already
covered this point previously a convertible debt is different from
straight debt only in the fact that there is an added element in the
contract that states that the lender can either receive his money back with
interests or the equivalent amount in shares of your company at a certain
point in time very concretely you get the money you pay nothing every month
and at the end of the loan period let’s say three years or five years you either
pay back the total amount gieux interests included or give shares
for a total value equal to the amount you it is normally expected that the
lender will convert to the debt into shares when the time comes this debt is
then actually halfway between a debt and a sale of equity the way it works is
that the loan usually runs until you get to the next round of investment or to a
significant milestone and at that time the person that lends you the money can
get shares for an amount equivalent to the money that was given to you
a discount to compensate the lender for the risk he has taken so for example if
you sign a convertible loan for $100,000 you could have a 7% interest rate with
that loan so that if the lender needs to get his money back then that will be the
terms on which you would pay that back to him if on the contrary the debt is
converted into equity then he will be getting shares of your company worth
$100,000 plus the discounts that was negotiated at the beginning in this
example let’s say 15% you have to remember though that for a convertible
debt to work you have to be able to get to another round of funding or to the
major milestone you agreed upon if your company does not meet that milestone
then technically the lender could ask you to pay back the loan and force you
into bankruptcy if you’re not able to pay back so why would you be interested
in using convertible debt first because it’s much simpler to get then regular
investment money for regular rounds of funding you need to value your company
in order to define how many shares investors will get for their money in
the case of convertible debt this discussion is postponed to a later time
when you know better the second reason which is tie to the first one is that
because you will postpone the valuation discussion you will usually strike a
better deal and give away less shares when you are starting your company it is
super hard to determine the value of your company and when you give shares in
exchange for money so early on you’re never sure if you’re getting a great
deal at that time you will always feel like you’re getting a great deal because
you so much need that money to get started but down the road when you see
how your company was successful and you’ll have all the elements needed to
value your company correctly then you’ll have the final answer as to if it was a
good deal or not for example your company could be way
more successful than you anticipated and in that case great chances are that
you’ll have given away more shares than you should have
so convertible debt gets you the money all the same but you get to value your
company when you know better which is great the Small Business Administration is a
government entity whose purpose is to help small businesses to grow and thrive
one of their activities is to help small businesses get loans people usually
refer to it as SBA loans but that’s not exactly how it works
the SBA does not lend money per se to small businesses it rather provides
guarantees to financial institutions so as to reduce their risk and facilitate
small businesses access to loans the way it works is that if your company is
eligible the SBA will take responsibility for a large portion of
your loan and if your company cannot paint anymore
the SBA will pay back the amount on which it took responsibility in some
cases its responsibility can go up to 80% of the loan which is very high that
means that when a bank evaluates a loan for a company that is eligible for
sba-backed loans then the risk the bank is taking is really on only 20% of the
total amount in concrete terms if you borrow $100,000 from a bank and
the SBA guarantees 80% of it that means the bank will be able to get
back up to $80,000 from the SBA if you default and it’s risk is therefore on
only $20,000 out of the total loan in essence for the bank then it is as if
they were considering giving you a much smaller loan and it becomes therefore
much easier for your company to get it of course since the SBA is a
governmental entity and is putting taxpayer money at risk it is requiring a
lot of information before it decides to back a loan it can therefore be
administratively intensive for intrapreneur some of the requirements to
be eligible are to be working for profit to have looked for other sources of
money before turning to the SBA including you
your own personal money for at least 10% of the amount you are requesting to
present a business plan and financial projection in order to articulate why
you need the capital to have no debt obligation towards the US government and
for them to be able to take back the equipment you bought you with the loan
if necessary to recover as much money as possible if you default there are other
requirements and you can find all the details on the SBA website at sba.gov
those I think are all very valid requirements necessary to ensure that
the taxpayer money is well managed the second area the SBA is active on in
relation with our topic here is the SBIC or the small business investment
corporations the SBICs are private organizations that are
regulated by the SBA they invest in businesses and usually focus on
specialized areas for example on companies that have a socially or
economically disadvantaged to ownership to know more about SBA loans the best
next step is to go to the sba.gov website which is very well designed you
will find information on things like the 7a programs or the 504 programs and the
SBA AC programs those are the programs we have just described and since they
change regularly that’s the best way to get fresh information angel investors also called business
angels are very wealthy individuals who invest their own money into start-up
companies usually at their earliest stage they are accredited investors but
most of them are not professional investors there are successful
entrepreneurs people who held high management positions in leading firms
and sometimes just wealthy people angel investors invest in startups for many
reasons it can be as a hobby a way to stay active after having retired but
also a willingness to promote entrepreneurship by helping
entrepreneurs in other cases they invest because they believe in the project and
want to be part of the potential next big thing they all have at least one
thing in common they invest their money to get a significant return on
investment they invest in companies in their infancy when it’s not clear yet
that the company will be successful in its market and sometimes even before it
has earned its first dollar many angels specialize in certain fields or market
based on their own experience one of the big difficulties when you invest in
startups which we will see is also shared by venture capitalists is that
you invest in companies that are supposed to have a game-changing product
and to be able to understand the potential of that product you have to
have some experience in that market so it’s only logical that investors focus
on fields they know so that they can have a solid opinion on the potential
for success of the companies they invest in now let’s talk about the types of
investments angel investors get into usually they tend to invest individually
between $25,000 to $200,000 per deal which is usually insufficient in itself
angel investors therefore group around the deal to invest together amounts that
range between $100,000 to $1,000,000 and on average they invest as a group
around half a million dollars per dealer angel investors are the stepping stone
between the funding you get through your own means plus debt and venture capital
companies that approach angel investors usually have a specific project they
need to deliver such as developing a product to the point that you can hit
the market or put in place the structure the company needs to generate large
scales of revenue it’s those kind of big milestones that angel investors are
looking to fund so that upon their completion the company can have its next
round of funding potentially with venture capital in this first video on venture capital I
would like to set the scene of how venture capital works from a high-level
standpoint I think it’s important to understand who the key stakeholders are
and what venture capitalists also called VCS
actually do outside of investing capital into startups a venture capital firm
usually operates on a 10-year cycle during which it will go through five
steps each fund has a limited lifespan and successful VC’s raise and run a
number of funds over the years the first step will be for them to raise capital
just as you will be doing but lots more of it with an average font size of a
hundred and fifty million dollars then VCS will start reviewing and investing
in deals such as potentially yours the next step is to make sure things go as
planned by participating to the management of the companies they
invested in usually as being members of the board then comes the time to harvest
the return of their investments by exiting the companies they invested in
through the sale of their shares and the last step is to return the funds with
the expected return on investment to the original investors the ones that
provided the original one hundred and fifty million dollars let’s look now at
each step in more detail the first step is when V sees themselves raise capital
to constitute the fund they will be managing during the following ten years
the boss of the VC firm is also called the general partner he is the leader of
the firm and will be working with his team to raise capital exactly the same
way you will be doing it the big difference though is that his job is
much more difficult since he is not raising money on a specific project but
rather on his ability and the ability of his team to identify
invest in and cash out from business deals that should prove in the future
very rewarding but have not been identified yet as you’re probably
guessing one of the key factors is going to be the past experience and
achievements of the general partner and his team which will make that process
possible the general partner and his team will be
raising capital from what is called limited partners limited partners are
usually either very wealthy individuals corporations or pension funds and all of
them are looking to make a very big return on investment by investing in the
very risky business of venture capital they are called
limited partners because the loss that can incur if all fails is limited to the
amount of money they have put into the fund not more you might rightly say that
this is already a huge potential loss but still it’s not the same as being
responsible for the money and potential liabilities that could arise from the
operations of the company you invested in the fund is constituted on the basis
of a number of potential limitations that are contractually agreed with the
limited partners such as the field or industry in which the money will be
invested the development phase of the projects or companies investing in for
example in early-stage companies or at different maturity levels the timeframe
that the VC firm has to run its operations for example it could be set
to a total of 10 years which would require the VC firm to return the
capital and the return on investment to the limited partners at the end of a
10-year period whatever the outcome is so the first year of the life of the
firm is dedicated to securing the capital the firm will be managing for
them this tells you as well that VC firms are
targeting specific businesses and you should therefore make sure that you get
in contact with those firms that are interested in companies that have the
same profile as yours once you have identified those VC firms you can start
the process of getting in contact with them you one thing we all need to realize is that
the job of the VC is very different from most of our jobs in one sense at least
their job is very visible and super risky and if things don’t go as planned
and if the firm does not generate the expected return for its limited partners
a general partner and some of his team may not be able to raise another fund
most of us can live with blunders in our careers those are not communicated
publicly and chances are they’ll just be a small bump in our history but for VCS
it’s quite different this is plagued our career with each fund they run and a few
people will remember past successes when a big failure comes so why is it so
important to understand that when raising capital through venture
capitalists well simply because there is not much room for error on the VC side
while at the same time they play a very risky game VC’s investing companies are
expected to be game changers in their field through technology drug
development and so on game-changing companies are therefore alone in their
field since not every company can be groundbreaking most companies follow the
hard and one-of-a-kind every few years will come with a great new concept or
technology and change the game for everyone else that means that VC’s
usually review and invest in companies that propose new products and services
and that those same visas need to be able to make the difference between the
idea that will not succeed the one that will barely succeed and the one that
will be really game-changing for its industry to do so VCS will look into
every aspect of their work to reduce their risks as much as possible in the
hope of maximizing their chances of delivering the promised returns to the
limited partners to do so they will focus on industry
is where they have extensive experience and understand what it takes to be
successful what problems are latent and require new technology and they
understand where the market is going then most of them will invest in
companies that have attained a certain level of maturity and will have proven
their ability to generate revenue and sometimes lots of it
sometimes the maturity factor will not be the revenue generated but when
there’s a big problem in an industry and that a company is planning on bringing a
solution the big uncertainty will be in their ability to develop the product
then the factor that will determine the maturity level will be the level of
development of the product and if for example the biggest hurdles have been
passed successfully they will look as well for massive markets where the
company has a lot of room to grow they will look at business models that scale
which means that once those businesses have passed the time of initial
investment their revenue will grow much faster than their cost of operations and
outside of reducing their risks the visas are also pragmatic people they are
not dreamers and they not only take into consideration the odds of success of
companies they actually factor it in their model they understand that 80% of
all startups fail and so that despite all of their efforts knowledge
experience and methodology they will most likely be wrong 80% of the time or
maybe just 70% of the time thanks to all the things they do to beat the odds so
they know that out of 10 companies they will invest in only a small portion will
be successful they go even further and assume that out of 10 companies 4 will
be an utter disaster and just go bankrupt and on which they will lose all
their capital and their expected return on investment another 3 will barely
survive and generate enough money to pay for its expenses or at best
be profitable but in a much smaller market than expected and therefore with
no potential to be a big success and here again they might get back their
capital but definitely not generate any return then about two companies should
be successful be well positioned in a big market and make up for the losses of
the other seven companies and last they hope they will have one super successful
company the likes of Google or Facebook in their portfolio which will have them
be way more successful than they originally planned that also means that
as we’ve just seen out of ten investments VCS make they really expect
only three of them to be successful and make up for all the losses of the other
seven companies they invested in the issue is that at the time of the
investment they have no idea which one is which the rule is then therefore
simple each company they invest in should yield a potential success and
therefore be expected to generate a return that will make up for all the
failures of the other companies and so when people would usually expect 20% or
30% or even 50% return on investment VCS will expect a 10x – 30 x-factor that
means that they invest in companies that they believe can be worth after five to
seven years from ten times to 30 times their original value that’s ten times –
30 times that means they’re not looking for good companies not for potential
successful companies they are looking for potential googles or Facebook’s in
every project they review because it’s only by doing that and being wrong seven
times out of 10 that they will be able to deliver on their commitments to the
limited partners you in short the venture capitalists you
will meet will be looking for a certain number of things before they even
consider investing in your business first you’ll have to be solving a big
problem in a big market in a growing market a big problem means something
that people cannot live with in our eager for you to solve the question is
can people live with the problem if the answer is yes then that means there
might be difficulties selling a product as people will not have the urgency and
could be reluctant to change their habits then you’ll have to be well on
your way either from a revenue standpoint customer acquisition
standpoint or product development standpoint with a great number of
uncertainties lifted as to the potential success of your company you’ll have to
know the VC process like the back of your hand know what a term sheet is what
it contains what our due diligence materials there are great books out
there that detail all the specifics which you need to know even before you
start speaking with VCS the VC will be looking for a strong team everyone knows
that the team makes the success of the company not the rest it might seem a bit
extreme but it’s the truth there are countless example where
companies with similar products have had very different successes with some of
them becoming market leaders and others disappearing altogether and even
companies deemed unsuccessful who were turned completely around by a great team
so the team is what makes the difference it is the people who will be able to
face problems and turn them into opportunities as mentioned earlier you
will have to demonstrate your ability to multiply by at least tenfold the value
of your company over the 5 years after the investment is made and last but not
least you need to be very clear up front on your exit strategy and how the VC
will turn his stakes in your company into a massive return if that’s through
an acquisition you should already know who are the top
five companies you expect to be acquired by you

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