The Dilettante's Guide to Being Your Own Boss, Part 3: The Financial Quest
At this point, you have decided that an idea is right, you have researched the market and learned the craft (preferably through experience) behind the idea, as well as evaluated the characteristics of similar products by companies that are about to be your competition. Now what? A crucial quest now awaits the bold entrepreneur – finding money. In this post, we will discuss the different stages trough which a startup to receives financing.
Stage I: Seed Money
Friends and Family
In trying to obtain some startup capital, the first door to knock is the one of family, and sometimes friends. I am pretty sure that your family will support you in your business (if they believe in it as well) by giving you a grant or interest-free money. Friends can also help, but they prefer not to do so financially, so be willing to ask only your closest friends for some funding.
Angel Investors
If family and friends do not provide enough, there are angel investors. These guys are usually successful entrepreneurs themselves or successful corporate employees (usually executives), searching for high-risk, high growth potential businesses to invest in. If your prospects for growth are above average, it would be fairly easy to find an angel investor or investors. Talking to individuals connected to high net worth people like bankers could be a solid start. On the upside, angel investors can provide you with the money you need as well as some advice (chances are that you are not the first entrepreneur they are investing in,) but on the downside, these early investors are paid with equity, or ownership of the firm, ranging from a minimum of 10% to sometimes 50% of your newly founded business. No interest payments, but a big piece of the profit pie.
Stage II: Venture Capital Firms
After successfully starting off with an angel investor, and you still require additional funding or the amount angel investors are willing to invest is too low, it’s time to turn to venture capitalists. These investors differ from angel investors in that they do not act individually by investing their own money, but actually manage pools of funds by choosing new businesses in which the funds will be invested most successfully (highest return). The logic is that the small number of gold mines that are hit will bring more money than the investments in meager or downright money losing firms, making the venture capital firm profitable. In a way, venture capital firms are like mutual funds, differing by investing the pooled money into promising new businesses, rather than already established ones. Before trying to get in touch with VC firms, prepare a very short business plan (that discusses the idea and the way of making money) of about 1-3 pages. Subsequently, research VC firms that you would be interested in cooperating with, and send e-mails to the firms on your shortlist, asking for a brief meeting at which you will present your idea. Personal connections to a venture capitalist trough someone you know are pretty handy as well. Note that obtaining money in this way is as expensive as with angel investors, with all funds coming at a high equity percentage price tag.
They are other ways of raising capital, such as crowdfunding and other innovative strategies, but I will put them off for a later time. I hope that with this post I have charted out possible financing plans for your idea, and I leave you with a simple, very applicable rule in financing any independent project: be sure to have at least 50% of your startup capital needs before thinking about ways of obtaining the other half. In that way you are less likely to get bogged down in debt or required to give up a big part of your future business, as well as be more motivated to completely pursue the idea, for your hard earned money is on the line.
Follow this guide and article recommendations pertaining to entrepreneurship from around the web at beingyourboss.wordpress.com. We search to cover practical points by experts (people with credibility), and we tend to minimize the motivational fluff, but it still sometimes finds its way.
Stage I: Seed Money
Friends and Family
In trying to obtain some startup capital, the first door to knock is the one of family, and sometimes friends. I am pretty sure that your family will support you in your business (if they believe in it as well) by giving you a grant or interest-free money. Friends can also help, but they prefer not to do so financially, so be willing to ask only your closest friends for some funding.
Angel Investors
If family and friends do not provide enough, there are angel investors. These guys are usually successful entrepreneurs themselves or successful corporate employees (usually executives), searching for high-risk, high growth potential businesses to invest in. If your prospects for growth are above average, it would be fairly easy to find an angel investor or investors. Talking to individuals connected to high net worth people like bankers could be a solid start. On the upside, angel investors can provide you with the money you need as well as some advice (chances are that you are not the first entrepreneur they are investing in,) but on the downside, these early investors are paid with equity, or ownership of the firm, ranging from a minimum of 10% to sometimes 50% of your newly founded business. No interest payments, but a big piece of the profit pie.
Stage II: Venture Capital Firms
After successfully starting off with an angel investor, and you still require additional funding or the amount angel investors are willing to invest is too low, it’s time to turn to venture capitalists. These investors differ from angel investors in that they do not act individually by investing their own money, but actually manage pools of funds by choosing new businesses in which the funds will be invested most successfully (highest return). The logic is that the small number of gold mines that are hit will bring more money than the investments in meager or downright money losing firms, making the venture capital firm profitable. In a way, venture capital firms are like mutual funds, differing by investing the pooled money into promising new businesses, rather than already established ones. Before trying to get in touch with VC firms, prepare a very short business plan (that discusses the idea and the way of making money) of about 1-3 pages. Subsequently, research VC firms that you would be interested in cooperating with, and send e-mails to the firms on your shortlist, asking for a brief meeting at which you will present your idea. Personal connections to a venture capitalist trough someone you know are pretty handy as well. Note that obtaining money in this way is as expensive as with angel investors, with all funds coming at a high equity percentage price tag.
They are other ways of raising capital, such as crowdfunding and other innovative strategies, but I will put them off for a later time. I hope that with this post I have charted out possible financing plans for your idea, and I leave you with a simple, very applicable rule in financing any independent project: be sure to have at least 50% of your startup capital needs before thinking about ways of obtaining the other half. In that way you are less likely to get bogged down in debt or required to give up a big part of your future business, as well as be more motivated to completely pursue the idea, for your hard earned money is on the line.
Follow this guide and article recommendations pertaining to entrepreneurship from around the web at beingyourboss.wordpress.com. We search to cover practical points by experts (people with credibility), and we tend to minimize the motivational fluff, but it still sometimes finds its way.
Ljupcho Naumov