Introduction:
Starting a new company is an exciting journey filled with challenges and opportunities. Whether it's a product, a service, or a vision, every new company begins with an idea that has never been done before. This article will take you through the startup journey, it will provide you with strategies to fund your startup vision and funding process
Strategies for Funding Your Business
Strategy 1: Approach the Sharks
The first group of people to approach are what I call the sharks. These are the venture capitalists, angel investors, and professional investors of the world. They are people with a lot of experience in business who are looking for wise, smart investments and experienced entrepreneurs to invest in. They typically bet on proven, award-winning horses or jockeys and are unlikely to invest in pie-in-the-sky ideas.
If you manage to convince them, they will invest in your business. However, you should be prepared to give up a significant chunk of your company because they're risking their money on you. Also, sharks may ask for a big piece of your business, which could be a disadvantage.
Strategy 2: Approach the Dolphin
The second group of people to approach is what I call the dolphins. These are the financial institutions such as banks and credit unions. Banks can be tough to deal with, especially if you don't have a proven track record. However, if you have a good credit score and a solid business plan, you might be able to get a loan.
The main issue with dolphins is that they are very conservative, and they often don't loan you money when you need it most. They want to protect their investment and their money lending business. So, approach dolphins only when you have a well-thought-out business plan.
Strategy 3: Approach the Fish
The third group of people to approach is what I call the fish. These are your family, friends, and acquaintances. You can borrow money from them, but be careful. They might be the ones who are dumb enough to lend you money, knowing that you might lose it. So, make sure you have a plan to pay them back.
Also, borrowing from family and friends can lead to tension and broken relationships if you can't pay them back on time. So, approach fish only if you're confident you can pay them back.
Strategy 4: Help Yourself
Lastly, before approaching anyone for money, you need to help yourself. No one is obligated to help you if you don't help yourself. Successful people want to see that you're adding value before you ask for anything in return. So, study their work, offer your help, and give them something before you ask for anything.
The Vision
The vision is the core of any startup. It is the driving force that motivates entrepreneurs to take a risk and pursue their dreams. Developing a clear and compelling vision requires a lot of research and analysis. Entrepreneurs need to identify gaps in the market, evaluate competition, and determine how their product or service will provide a unique solution.
The Project, The Product, The Service
Once the vision is clear, the next step is to focus on the project, product, or service. Entrepreneurs need to develop a prototype, conduct tests, and refine the product or service to meet customer needs. This process requires time, effort, and resources.
Legal Structure and Costs
Before a startup can begin to attract investors, it needs to establish a legal structure. In the US, incorporating a company costs between $25 and a few thousand dollars. This includes registration fees, which vary depending on location, and legal fees, which depend on the complexity of the shareholders' agreement.
Seed Round of Investment
With the legal structure in place, entrepreneurs often need to raise funds to cover expenses, such as renting a server to develop the product. This is where the seed round of investment comes in. Early-stage startups usually issue 100,000 shares of equal ownership and decide who gets how many. In most cases, family and friends or crowdsourcing is used to obtain seed capital. Once the shares are issued, a well-off family friend can invest in the company for a share of the ownership, typically 20% for $50,000.
Series A Round
As the startup grows and attracts customers, it will need more funding. This is where the Series A round comes in. Entrepreneurs will seek investments of $1 million or more from angel investors and venture capitalists. Angel investors are individuals who professionally invest their own money in early-stage ventures, while venture capitalists are people who work for venture capital firms. They take other people's money and invest in young, risky companies such as startups.
Negotiating Valuation and Smart Money
Investors want a low post-money valuation to get more for their money, while entrepreneurs want a high post-money valuation to keep a larger share. Negotiations often take place to determine the post-money valuation of the startup. In some cases, entrepreneurs will receive offers from multiple investors, including venture capitalists and angel investors. When this happens, entrepreneurs need to consider the value of smart money. Smart money refers to an investor who not only invests money but also provides valuable connections and resources to the startup.
Dilution and Ownership
Once the funding is secured, entrepreneurs will be faced with dilution. The new investors coming on board will own a share of the company, which will dilute the ownership of the entrepreneurs. The percentage of ownership that each person had before the Series A investment will be reduced proportionally. However, the total number of shares of the company will increase, and entrepreneurs will not lose their existing shares.