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Funding Options for your Venture

Now that we have explored financial plan. In order to do so we need funding. In this chapter we will explore how to go about to funding your idea. I love the quote by Josephine Tessier “Anything that comes easy, comes wrong.” and I absolutely agree with her and I am sure you will also agree.

There are many ways to get funding. Before we go into that let us review the “MONEY RULE”.

Money Rule

Those with it make the rules. Money is there but you need to know where to seek for it. To be successful you must be able to successfully raise funds. Money for your ideas are “risk money” to the stakeholder.

Why Do You Need Funding?

The reason why you usually need funding is for fixed capital (this will include equipment, fixed assets), working capital (this will include rental, salaries and other day to day expenses) and growth capital (this will be for expansion).

Sources of Funding

There are several sources of fund available to you. The most common are

  • Personal savings
  • Friends and family
  • Venture capital
  • Angels and private investors
  • Corporations
  • Grants and Incentives i.e. State, Federal and Agencies
  • Debt financing
  • Initial public offering (IPO)

Beside personal savings the others are sometime refered to as opm (pronounced as opium) other peoples money. Contrary to believe actually it is harder to manage OPM a your own money. Now let us take a look at each one of these sources.

Personal savings

Most entrepreneurs usually start off their business with their personal savings as this would be the easiest source of funding. However if you are a young person most likely you will not have a large amount of savings. Even other funders prefer to fund entrepreneurs who have invested some of their own money, the reason being that this will give confidence to the investor that the entrepreneur is a serious entrepreneur. However it is difficult to keep funding with your funds. So at one time you will need to look for other funds.

Friends and family

Next line of funding usually can be raised from friends and family. This you will need to return and in the event you are NOT able to return this can create unnecessary tension and lead to other issues. This is particularly very true in Asian culture.

Venture capital

These are companies which invest for equity in your company. So in the event you do not make it you do not need to return the funds but these people will usually take an active role in your company. We are going to spend sometime on this and understand how this works.

Venture capital is a term to describe financing for startup and early stage businesses as well as businesses in “turn around” situations. Venture capital investments are usually high risk investments, but with above average returns. A venture capitalist (VC) is a person who makes the investments.

Venture capital funds are made up of financial capital of third party investors that are used to fund business which are considered too risky for typical equity investors or bank loans. These third parties source of funds are known as alternative investment and come from savings accounts, insurance Policy, company stocks and shares, unit trust and pension funds. This is how some of these funds are available to give good returns as some of these investments give high returns.

The VC takes in the form of either equity participation, or a combination of equity participation and debt obligation which are convertible debt instruments that become equity if a certain level of risk is exceeded.

Venture capitalist becomes part owner of the new venture. Most investments are structured as preferred shares and the common stock often reserved by covenant for a future buyout, as VC investment criteria usually include a planned exit event (an IPO or acquisition), normally within three to seven years.

Angels and private investors

Angels and private investors are high net worth individuals who invest on young startups. They will fund using their own funds. Besides funding they also provide mentoring. In return depending on your negotiation skill they will take any percentage of the venture but usually anything between 10 to 50 %.

Corporations

Sometimes you would be able to convince a larger company to fund you. This is when corporate entrepreneurship is flourishing as companies do not want to lose good employee to entrepreneurship. By supporting and investing on these young entrepreneurs the larger company will benefit by having a new venture within the organization. Often entrepreneurs thinking and telling their present boss that they have an idea is not a good idea. These entrepreneurs feel the bosses will not be happy to know that you are going to be an entrepreneur but with the world changing at high speed companies are quite willing to explore these new and bright ideas of young entrepreneurs.

Grants and Incentives i.e. State, Federal and Agencies

There are several grants available at state and national level for which you can apply. Usually these grants are not repayable. However these are reimbursment meaning you need to actually spend before getting the fund from the fund.

Debt financing

These are funding you need to repay bank and the people who provide these funding are commercial banks, assets based lenders, trade credit, equipment suppliers, commercial finance companies, savings and loan companies, stockbrokerage firms, insurance companies and credit union.

Initial public offering (IPO)

This is when you offer the share in your company to the public and raise funds. You raise money only the first time you sell the shares after which the money is only transacted between the buyer and seller.

In the next article we will look at venture capitalist in a bit more detail.

1 comment to Funding Options for your Venture

  • Apurva

    This write-up gives a condensed summary of what I think is one of the more important issue of ways to fund your business plans. Hope to see more on this topic.

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