startup funding explained | how to raise capital for business?

startup funding explained | how to raise capital for business?

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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, 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, 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. Th

2019-03-15 22:01

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