The Guide: Part 3: The Financial Quest

At this point you have decided that an idea is a right one, you have researched the market and learnt 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 an institution or private investor willing to capitalize your idea. It is always best to start with your own capital, but if your project requires more funds this post will show you some ways in which you can obtain them.

 

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 to do so non financially, so be willing to ask only your closest friends for some loans.

Angel Investors

If family and friends do not provide enough, there are angel investors. These guys are usually successful entrepreneurs themselves or successful corporate executives, searching for high- growth potential businesses to invest in. If your project’s prospects for growth are above average, it would be easier to find an angel investor/s. 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 much lower profits (if there are some!).

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 email to the firms in 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 a great aid as well.  Note that obtaining money in this way is just as expensive as with angel investors, with all funds coming at a high equity percentage price tag.

There 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 a third and preferably half of your startup capital needs met from your own earnings and investments before thinking about means of obtaining the other portion. 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.

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