Different funding options for your Startup

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Here are a few funding options that you can turn to, if you are looking to fund your startup.

 

BOOTSTRAPPING

Sometimes the wisest funding option is to rough it out and pull through, cutting corners and building your company only on blood, sweat, tears and past savings. Bootstrapping usually requires you to dig deep in your saving, go through credit card after credit card, get your friends and family to loan you random amounts, and exchange stock for equity. Other than the constant focus on the money that is always depleting, bootstrapping allows founder to deal with the implementation and completion of the project, while also paying attention to traction, without the interference of external investors constantly waiting on results. Another aspect of roughing it out is getting larger profit margins moving forward.

UPS AND DOWNS OF BOOTSTRAPPING:

1) Additional time
You would be saving out on the time it takes to raise capital, which is a task in itself, taking from three to six months and sometimes even more, you can call this a full-time job in itself. If you want to beat the system, spend this same time generating revenue and filling up those stockpiles so you can use this when you begin bootstrapping.

2) Efficiency
You can’t spend what you don’t have, and using this logic, bootstrappers have to be wise with their expenses. Being the little money that they have, bootstrappers tend to use it well, spend carefully and track everything professionally which are some of the most systematic financial practices.

3) Not as fast
When you are bootstrapping, you can make random and necessary decisions since you aren’t working with investors. However, without a ton of funding, most bootstrappers work with a smaller, more confident team, redirecting resources as required. This might not be as fast as if you had investors and sometimes you find your better-funded competition catching up or even overtaking you.

4) Better image for your company
If your startup has the right investors, this sends a clear message to other companies, recruits, partners and even investors that you know what you are doing. If reputed investors invested in you, they know what they are getting into, implying you must be doing something right. This status can be what gets you going further since you would be able to hire talent, get into the right meetings and so on, just because of your investor’s reputation.

5) Additional control
This largely depends on where and how you have raised your revenue. If the money has come from investors, professional or not, who are rather anxious, they would expect to see results and that means you rushing to show for something. This can lead to the biggest rookie startup mistake, ‘ starting fast and exiting big’, which is the major way investors receive returns on their investment. If you chose to bootstrap instead, you would be able to move at your own pace.

6) Flexibility
If you are bootstrapping, you can change and modify your approach as you move along, but when you have investors you need permissions, everyone needs to be on the same page and this can sometimes be a little harder. After you have the money of your investors, if you decide on a new approach, you will have to convince your investors about a change in your plan to a new one and you will need everyone to agree.

7) Personal risk
The risk is what the greatest entrepreneurs live for and when bootstrapping, although the founder of the startup is preserving a larger amount of the value, there is an equally, if not larger risk. If you manage to raise the money, you would be leveling the playing field.

8) Equity
You usually get based on what you give and if you had to raise giant wads of money to get your startup going, you would have to part with large chunks of equity as well. This means you are giving up a lot of the ownership of your company.

 

EQUITY FUNDING

Equity is always loomed by the harsh reality that you are giving up ownership of your company, sometimes this means losing a lot of the control you initially had. If another individual receives a stake in your company, whether friend or investor, you are knotted with the person throughout the life of the company. Recovering equity once it has been parted with is not easy to come by and it will always be a difficult slope to mount for the founders.


1) ANGEL INVESTORS

In the tech scene, an angel is someone who is relatively rich and sometimes choose to invest in startups, making them angel investors.

Most startups prefer working with angels for two reasons:

1) Most of them having made their money in the tech and IT industry, understand startup’s situation and they would be able to provide valuable information, advice and tips for getting out of sticky situations. Usually, their experience and connections being more valuable.

2) Angels usually invest in a startup if they see a product going somewhere or because they wanted to and rarely cause they are looking for immediate returns on their investment. This is a major asset since you are not bound to show them immediate results to keep them at ease.

TIPS TO GO THROUGH WHEN FINDING THE RIGHT ANGEL INVESTOR:

1) You should want to work with them
If you are adding an investor to your team, you are making a long-term commitment to be working with that individual. You can consider your relationship with your investor like a marriage since you will be with the same person through the good and the bad, sickness and health. . . and since that is the situation, you have to make sure you are getting the right person as your investor.

2) Pick investors you look up to
Investors should be people you look up to and admire. If they are working in the same field as you, that is an added bonus. Make sure you respect and appreciate your investor and they have a lot of experience that you are in awe of and can learn from.

3) Choose investors who add value to every conversation they have
Keep your eyes open for investors who do not add the value you are looking for, and more importantly who don’t enrich your team or the way they think.

4) Find investors with good connections and a large contact list
Most often after providing the investment that your startup needs to take flight, an investor can assist you with an open door and this can go a long way in your industry. Your investor will need to know the right people and connect you with them.

5) Add investors who have time to assist
Your investor has to be with you right after the investment phase, and they should be able to guide you by providing the right steps moving forward. If they are too busy and coordinating meetings with your investors are a challenge, you should probably stay away from them. If they are not there in the initial phases, chances are they will not be there in the latter ones as well.

6) Find investors investing in you
Other than investing in your product or your startup, the investors should be willing to believe in you and your vision. They should look at you and feel you have the ability to captain your ship. They should know that your company will be worth a lot and you will be able to create the return on their investment. They should not look at your work as another investment in a product but as an investment in you and the people in the company.

7) Get investors who are on the same page with your long term plans for value creation and your exit strategy
Your investors don’t have to know all that you are doing in detail and they should not be hounding you for this information either. They should, however, agree with your the long term goals and be open to your exit plan and not be adding pressure while pushing their own plans

8) Find references
Talk to the people in the companies your investor added their money to in the past. Make sure you talk to the people who have interacted with them, CEOs and the likes, so you have the whole scoop on your investors and are better equipped to handle anything.

9) Fact check if the investor has backed the same company on multiple occasions
Your startup should also be looking for the same kind of investors because you can tell they are loyal. Loyalty is a trait that everyone should want on board.

 

2) VENTURE CAPITAL

Investment firms who invest in companies and startups, helping them grow and get larger, finally divesting for the sake of a larger financial return are called venture capitals. Most of the partners at VC firms have been or still are entrepreneurs, the rest have worked with enough of entrepreneurs to know the functioning of the system giving them an unearthing power to predict failure and success to a large extent.

 

DIFFERENT ROUNDS OF VENTURE FUNDING:

SEED FUNDING
Seed funding gives the startup enough monetary assistance to pay the salaries of the management team, create a proof of concept, prototype development and test it out to make sure that it is properly functional. The capital that has been raised at this phase is only limited by its dilutive impact at minimum valuations.

SERIES A ROUND
In most cases, the Series A is the companies first official institutional financing, which might be led by a bunch of venture investors. The main idea of this funding is to have enough financial assistance to continue development, hire good talent, achieve milestones that can bring the company value, and further validate the developed product. This can even go further to begin initiating business development and finding and wooing investors for the next financial round.

SERIES B ROUND
Each progressing round is usually larger than the last one, which makes Series B generally larger than the Series A round. By now the product being worked on should be completed and this take out a large chunk of the risk, usually relating to the technology being used, that was looming around the success and failure of the product. The initial revenue streams of the product will also be taking shape at this point. This financing round usually pays for operational development, making what you have bigger, additional product development, revenue traction, creating some more value to increase the funding for the next round of investment.

SERIES C ROUND
The much later and probably the final level of financing that the company goes through to better the balance sheets, create additional operating capital to achieve profitability, might even require the financial assistance for an acquisition. The most important however developing additional products and services or preparing the company for an exit via IPO through an acquisition.

HOW DOES THIS WORK?

A majority of the venture capital funds have a lifespan of 10 years, and their investment cycle is about three to five years, but there might be some exceptions. After raising the appropriate amount of funding, venture capital firms spend the next few years seeing another venture slowing down as they go and finally coming to a stop. By this time the company invested in should be three to four years in their fund cycle and they will be looking to raise the next round of funds.

In American markets, out of the hundreds and hundreds of venture capital funds, only 50 of them are making any money, but the system there is so competitive that it is quite difficult for anyone else to enter this group of 50 companies.

Paul Graham of Y Combinator once mentioned that the lower-tier VC firms are a bargain for founders. They might not be as wise or well-connected as the larger ones, but they’re definitely hungrier for deals. This usually implies that you should be able to negotiate your way to receiving better terms from them.

 

3) PRIVATE EQUITY AND INVESTMENT BANKERS

Private equity firms and venture capitals have very common business models but their focus and goals vary quite significantly. Venture capitals usually fund and invest in startups and young companies while providing them with the assistance they need and being available throughout the initial phases of their growth. Private equity on the other hand deal with more mature business in an attempt to better their financial performance in the long run through smart, structured and strategic management and general operational changes. They have been using the age old formula of buying companies, financing them through debt, restructuring them through layoffs or outsourcing and using other cost saving methods. Next, they drain all the cash that has been generated to clear all the debt and finally sell the company on the private or public market for a profit. In a majority of the instances, the private equity firm looks to keep the controlling stake.

There are instances where the founder of the startup had the ability to retain control of the startup yet its financial situation is not the best, putting it in a bad position when it comes to raising funds, the private equity firm can provide the financial assistance or even hop on as a strong financial partner. Startups generally do not receive high amount interests on anything other than their financial prospects.

WHAT IS THE RIGHT AMOUNT OF MONEY TO RAISE?

According to the founder of AngelList, Babak Nivi, an active investor himself, startups should raise enough capital for a 12 to 24-month runaway.

Raise Less
Startups should raise less capital if they are planning on keeping their valuation down and are looking for an early exit where everyone involved in the process, ie. Investors, employees, and founders, would have a quick and fruitful payday.

Raise More
If you are looking to keep your company running in the long run, and you want to shelter yourself within a safe funding experience or from the random randomness of growth, raising more money during funding helps. Startups should work toward maintaining control and looking after liquidation preferences and dilution. The most important thing they should comprehend is, if the startup’s valuation is high in this funding round, the startup will have to show some significant progress in the following round of funding.

Public Market
IPO is a dream that most entrepreneurs aim for, however like most dreams, they don’t come easy. IPO involves large amounts of stressful work while preparing and complying with regulations, not forgetting the large commissions for investment bankers who would have to manually create the securities. Lately, new forms of public market financing are coming up, one of the most significant being a joint venture between NASDAQ and Sharespost: Sharespost / NASDAQ Private Market is a stock market that has been created only for startups. Investors are allowed to purchase private company shares before they go public. Thanks to the JOBS act, these markets are getting quite popular, and are within the reach of practically anyone making it what one might call, a private stock exchange. Some of the startups traded on Sharespost are Github, Evernote, AirBnB, Dropbox among many others. ‘Second-market’ is the next best thing and a very large competitor to Sharespost.

 

DEBT FUNDING

According to its non-technical definition, debt is the amount of money you have to give back. In this day and age, debt comes by quite simply when dealing with financing a startup, since the world is filled with people willing to lend others money and very few people willing to trade this money for equity.

1. CONVERTIBLE DEBT / NOTE

Put simply, debt can easily be swapped for equity. A lot of times, this conversation is broken down in terms of dollars. For instance: a loan of $1,000,000 can be exchanged for the same value of stock but can also be talked about in terms of shares. Not so simply put, after being loaned an amount, the startup, and the creditor choose not to be compensated at the moment, but that the creditor will receive stock in the company worth the value of the loan in the future.

2. LOANS

For any startup, getting into debt is going to be quite difficult since there is a very large risk that has to be taken. Getting through the bank process for a loan might not be as easy as the system makes it sound. There are however a lot of incentives and schemes that are offered by different Government in several parts of the world that promote startups and entrepreneurs. Some of the examples of such schemes are SBA loan schemes offered the United States or Startup Loans provided in the UK.

Fundraising Process

1.Complete your elevator pitch
An elevator pitch comprises of a short two or three sentences in your idea. You should make sure you have a researched and detailed summary of your startup pitch to use whenever you need to or if the opportunity presents itself.

2.Pitch Deck
A short bullet point of your business plan. The format being used to get this done is not important, whether it is PowerPoint, keynote or any other, it needs to be a collection of slides that tell your business story.

3.Financial documents
There are some documents that are a big deal and others that aren’t, you have to make sure you have the basics within your presentation if you are planning on impressing anyone. The expenses of your operation, revenue projections, cash flow projections are some of the definitely must haves.

4.Business plan
Now you would have to get into a few details, a business plan needs to be a full length and detailed manifesto of your business. Although you might not see a lot of these among startups, if you are planning on having detailed documentation, you can never go wrong with being too detailed.

5.Progress tracking via spreadsheet or CRM
Everyone knows that fundraising is not a walk in the park, and being a long and difficult process, it should be organized making it a lot easier to get through. Treat it as a very well organized sales process. Make sure you are tracking what they are saying so you are better equipped if and when you are approaching the same people in the future.

6.Short is always better
Keep your pitch short, relevant and always exciting. Throw in a joke if the situation calls for it. Since your investors are quite busy, don’t get them to read through a lot of information, although you have it. Give them the highlights but know that you have the rest of they ask you for it. Jason Calacanis an SV angel investor explains: “I get a lot of emails from entrepreneurs. The best ones are short, to the point and include some questions and/or the product”

Tips on Fundraising:

1. Don’t get your hopes too high
A lot of startups know that fundraising is difficult but they have no real idea how difficult it is until they have put themselves in the hot seat. The first time you are getting this done, it is a lot harder than anyone expected. Most startups are completely disappointed by how difficult this is, so having low expectations take a lot of the sting away in one go.

2. Keep doing what you are doing
This seems like it is something a mother tells an aspiring eight grader working on a science project but this is some of the best advice you will receive. Don’t let the negativity of receiving funding put you down. Get back to work and keep working on the work your startup is trying to achieve. According to Paul Graham of Y Combinator, although this is very easy said, most founders cannot get back to working on their product.

3. Rejection is not about you
Do not take a NO personally, and definitely do not begin doubting yourself, there can always be a lot of reasons that you didn’t get the investment and the chance of the reason being you is very minuscule. You have to look at the bigger picture, that there are so many ideas out there and there are a large number of people hearing the same negative tone yelling a NO as you. The benchmark is quite high and the average venture capitalist accepts one startup out of every 400 which means there are a lot more people hearing a NO then there are hearing a yes.

4. Stay away from investors with no credentials below their belt
It is said that novice investors are the easiest to get by but although this is quite often true, they can also be the most dangerous to get by since they are quite nervous about what they are doing. Sadly, their nervousness can be divided by the amount that you are asking them to invest in you. If you are asking a first-time investor to raise $ 20,000, this accomplishment to them would seem proportionate to a VC fundraising $ 2 mil.

5. Remember where you are planted
One of the trickiest attributes of investors is their indefinite and undecided mind. The worst thing that you could get from investors is hearing the dreaded ‘no’ at the end of the conversation. However, you should remember that being rejected by investors is part of the game, it is better you get this out of your system in the beginning, over, it coming back to haunt you later on. Make sure you get straight to the point and you have some answer before leaving the meeting, whether it is a yes or a no or even a maybe and a promise of a second meeting.

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