"Don't loan for the dream, get an investment"
5th Aug 2017 18:45 ZeeshanTweet
A recent study showed that over 94% of new businesses fail during the initial year of action. Failure in achieving funding turns out to be one of the most common reasons. The long and yet thrilling transformation from the idea to a revenue generating empire needs fuel named capital. That’s why, at almost every stage of business-building, entrepreneurs find themselves asking – How to finance my startup?
Mark Cuban:”Only Morons Start a Business on a Loan”
As of today, the various ways of funding a startup may be bootstrapping, crowdfunding, angel investors, venture capitalists and incubators.
- Bootstrapping- Also known as Self-funding, a way of funding, especially when in the initial phase of the business. Novice entrepreneurs often have troubles getting funding without first showing some previous record and a plan for potential success.
- Crowdfunding- Crowdfunding is one of the trendy ways of funding a startup. It’s like taking a pre-order or contribution from more than one person at the same time.
- Angel Investors- Individuals with surplus money and a zeal to invest in new startups. They may work in groups of networks to screen the proposals collectively before investing. They may offer mentoring alongside capital. Angel investors have helped to start up lots of prominent companies like Google, Yahoo and Alibaba. In India, the co-founder of digital wallet firm FreeCharge Sandeep Tandon has emerged as the top angel investor in the first half of 2017 with 20+ deals so far.
- Venture Capital- Venture Capital is a professionally organised fund that is invested in companies having good potential. They usually invest in a business against equity and also provide expertise. They also make sure to evaluate the sustainability and scalability point of view. Some of the Venture Capitalists in India are – Nexus Venture Partners, Helion Ventures, Kalaari Capital.
- Incubators- Businesses in initial phase can consider Startup Incubators as a funding option. Found in almost every major city, these programs guide hundreds of start-up businesses every year. They often aggregate themselves into networks which are used to share good practices and new methodologies. The network allows collaboration between members of each incubator. Indian Angel Network, TLabs, UnLtd India, StartUp Mitra are some of the many.
The key to funding your idea is to woo venture capitalists and convince them to put their money in your dream. In addition to having a great idea in a promising industry, the other key factor is to ask for money at the right time in a VC’s life cycle.
Funding phases and their correlation with the VC’s life cycle:
Phase 1: Seed Funding- Seed funding usually comes from you the money allows you to solidify a talented team and a business plan which is required when the time comes to talk to the VC’s.
Phase 2: Round 1 of Funding- VC’s start when a group of people agree to put money in a pot and not see returns for 10 years. If the VC is worth 100 million then in round 1 they will invest about one-third of the fund in a variety of companies. As an entrepreneur, this is when you want your business idea to be noticed and funded.
Phase 3: Round 2 of Funding- Provided business is doing well you may receive a second round of funding after 3 years. At this point in the VC’s life cycle, the firm will look at their investments, weed out the ones that went belly-up, and invest more in companies doing well.
Phase 4: Expansion- Now your startup is 3 to 5 years old and hopefully close to turning a profit on its own. At this time funding will come from subordinated debt or preferred equity. This is the expansion phase. Until the startup can earn steady profits for an entire year, this growth money doesn't come from VC’s. But, this help start-ups push past the funded phase into the next level.
Phase 5: IPO or Sale- By now your startup is 5 to 10 years old you've either made it or failed it. Now the venture capitalists are ready for their payday, most VC firms enjoy a seven hundred percent return on their investment in companies which go public.
“Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1.”
Even the best investors make mistakes. Nolan Bushnell could have owned one-third of Apple. Atari founder turned down the thought of investing $50,000 as seed money in Apple. Had Bushnell said yes, he would have owned a third of Apple, a company that is today valued at about $300 billion.
The thrill of entrepreneurship lies in the core thought process behind making choices, investors may or may not believe in you but what’s more important is whether you have faith in yourself. You may get rejected, humiliated and become hopeless but as we know the darkest hour is just before the dawn. All we need is hope, Our destiny is not made by successes, its made by how we face rejection, how we handle defeat and move on.That’s what the essence of life is. And that’s what an entrepreneurial life is supposed to be.
“I look into the eyes of the entrepreneur before making investments. Their eyes are sparkling!”
- Masayoshi Son