Business Funding Basics

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Welcome

– Hi, I’m Rudolph Rosenberg, and welcome to Raising Startup Capital. In this course, I’ll go over the different ways you can raise capital for your business. I’ll talk about the process of raising capital, and go over some common elements like Valuation, and Business Plans.Then I’ll walk you through the pros and cons of using Crowdfunding, borrowing money from friends and family, securing loans, and partnering with Angel Investors, and venture capital firms.

I hope this course helps you to see and evaluate the possibilities of raising money for your business, or project. Now let’s get started with Raising Startup Capital.

What you should know before watching this course

– This course is directed towards entrepreneurs and startups. My goal is to give you an overview of the possible ways to raise money for your endeavors. This course shouldn’t be used as financial advice or a substitute for consulting a finacial advisor, accountant, or any other professional. This course is an overview of the main ways out there to raise capital and should be giving you the basics you need to understand what is the right path for you and for your specific business. If you have questions about specific business or financial situations, please seek the guidance of a professional.

Why do companies look for capital?

– There are many reasons why companies look for capital. Those companies can be startups, established companies, or not even companies yet, but just business projects. They can be online or brick and mortar companies. They can be technology companies or more traditional ones. But the one thing that those companies share is the fact that they’re trying to achieve something, and they need capital to achieve it. That something is usually a self-contained projector, in other words, a project that is specific in natureand that is time-bound.

For example, the development and launch of a product is a self-contained project that could require capital that the company does not have. The company, therefore, has either the choice of waitinguntil it has enough money to develop and launch the product or to look for capital in order to do the development and launch as soon as possible. Some projects can wait to be started when you have the money, and other projects simply need to be started as soon as possible, before the opportunity disappears.

For a business project, although it looks like it could be different, even though the company doesn’t exist yet, it is pretty much the same thing. A business project is a company that has not started yet and has its founder as its one and only employee. It usually needs to develop and launch its first product, and to do that, it just needs more things, that an established company already has, such as office space or employees. In essence, a new product and a new business is pretty much the same when it comes to raising capital.

Some of the reasons companies raise capital are the development and launch of a product that requires significant funds up front. A good example would be if you decide to develop a new product, then need to produce a certain quantity of it and store it until it is sold. The cost of all those steps can add up to a significant amount and, therefore, requiring you to raise capital. Or to overcome a significant barrier to entry in a market. This can, for example, be seen in the biotech or pharmaceutical industries, where you need to do a lot of research before you get to a product that can be sold, and even then, that product needs to go through many types of approvals and certifications before it can be put on the market.

Or also the need to grow the company at a very fast pace to gain a strategic benefit from being the market leader. Let’s take, for example, a company that sells a product to the banking industry. Then the company has a quite low number of customers it can sell to.Once its product is ready for launch, the company could need capital in order to put together a sales team that can take over the market as fast as possible,before the competition gets in. The benefit here would be to build a stronghold that would be very difficult to take over for any given competitor.

You need, though, to be careful to always have a time-bound element to the reason you’re raising capital,even if the deadline is very far in the future. An error sometimes made by entrepreneurs is to build a company that requires regular injections of cash in order to survive. A key element to the success of a business is ultimately to be profitable and self-sustaining, which means that once the project for which you are raising capital is delivered, then your company should be able to continue to thrive on its own.

Looking at different entrepreneurs, companies, and strategies

– There’s no one strategy to raising capital. There are many strategies and each one of them is unique to your personality, your business, and the stage of development your company is in. If you read the business news, you might be used to seeing a lot of articles about venture capitalists investing millions of dollars into businesses. But venture capital is but a part of the capital investment landscape. There are many other sources of capital and each has its set of benefits and limitations. But first, it all starts with you, as an entrepreneur.

For example, how easily can you share informationabout your company with the outside world without being afraid of having your idea stolen? Some of the strategies out there involve a fair amount of information sharing with potential investors. To be able to tap into those sources of capital, you need to share your vision, why you believe your business is going to succeed. And your business model, which in other terms means how you’re going to make money.

We have a tendency to overrate the risks we face by sharing our business ideas, but nonetheless, you have to assess how comfortable you are with sharing vital information about your business. If this is a big no-no for you, then you need to build your strategy usingsources of capital that will allow you to share little to no information about your business. Then, the type of business you will be running makes a big difference as well. If you’re looking to start an online business, your funding needs will be much lower than if it’s a brick and mortar business.

Online businesses require very little capital whencompared to the relatively limitless return it can provide. If, on the contrary, you’re looking to open a shop you’re going to have significant upfront investments to make and will therefore have to tap into more sources of capital. If you start a consulting firm, which is pretty much a business around your main competency, that can be started as soon as you have business cards and a computer. For that type of business, you might actually not even need any funding and the sole investor is going to be you.

If, on the contrary, you decide to manufacture a product and sell them online or through distributors,then you will have to secure enough capital to get the initial inventory and store it somewhere. There are many different types of sources of capital out there and depending on what type of entrepreneur you are,what business you’re in, and at what stage of development your company is in, you’ll see that there are a number of paths you can take. There’s no right or wrong answer to how to raise capital for your business, but there are better fits depending on your unique situation.

How risky is it to share your idea?

– When it comes to sharing our ideas with other people, many of us have the tendency to overrate the true risk of doing so. When I have a good idea, I have the reflex of wanting to keep it to myself, as if I was taking the risk of losing it to a potential competitorjust by talking about it. In reality, there are very little chances of that happening and for very logical reasons. Of course I’m not saying that you should tell everyone about your idea just because there’s very little risk of it being stolen, but nonetheless, there is no reason to keep it only to yourself to the point of hindering your development efforts.

First, it takes a big, even a massive, effort, to start a new business, and out of all the people who happen to have a good business idea or hear of one, for that matter, only a tiny portion will actually think about doing something about it. Maybe only one percent.Out of that one percent, maybe just another one percent will actually do something about it. If we quickly do the math here, that means that only one person in ten thousand you’re going to be telling it to, could actually do something about it which means that if you talk about your plans within your circle of friends or to your family, the probability of each resulting in someone stealing your idea is very close to zero.

My conclusion here is that there’s no true reason to hold back and not share it with your friends and familyabout what you’re trying to achieve. Then you could tell me that you will talk about your project to potential investors who have the means to steal your idea and actually are looking for ideas. Here again, I don’t think this is a true representation of how things work. Investors are actually not looking for ideas.Investors want to invest in businesses that have the idea and have demonstrated their ability to turn the investor’s money into ten times what it’s worth.

If you see a great entrepreneur coming with a great idea, why would you go through the trouble of findinganother entrepreneur to do the same thing? Isn’t that a pure waste of time? If you need investments, do share your ideas and business plan with investors, and by the way, we don’t hear so much about investors putting together teams or businesses around an idea.The simple reason is that this is actually the job of the entrepreneur himself, not the investor. When someone is an investor, that means he wants to see the whole package, not just the idea.

Third, even if you were to tell your idea to that one person in ten thousand or to that one of a kind investor who wants to steal your idea, then what’s the worst thing that could happen? You’ll just have a competitor in front of you. Once your business is thriving, you’ll attract the eyes of many individuals and companies that will want to get a slice of your market.Competitors will pop up all around you and only the fittest will survive.

What difference does it make that you get that first competitor a bit earlier than anticipated? We all tend to not talk about our business idea because we want to be the first to hit the market. But being the first to market is barely an advantage. You might get a few more sales at the beginning because you’re the first to offer that product or service but very quickly as competitors join you in offering that product or service, you will most likely have no benefit left from having been the first.

Even worse, being the first is sometimes a big risk as you invest a lot of money on an idea that has not been tested yet for which the market could not be ready. Some of us just have the vision a bit too earlyand take a bigger risk of failing and in that case, being the second one or actually the third one in the marketis actually sometimes an advantage because you get to see what your competitors are doing right or wrong. I’m not saying that you should walk aroundwith a sign on your back explaining your business model.

I don’t think either that you should hold back from sharing it with investors or telling your friends and family about it.

It takes time to raise capital

– Raising capital takes time. Not an infinite amount of time, but it usually takes a few months. Between the time that you put together your business plan, define your capital-search strategy, start meeting with potential investors, secure the deal and get the funds, it can easily take six to nine months. What that means is that if your business needs that capital to start it’s operations, you’d better think twice before you quit what you’re doing now, at least until you know when approximately you’ll get the funds. It also means that raising capital is rarelythe solution to solve an urgent problem.

If you need capital right away to save your business, or to start it fast to solve a personal situation, then you’d better look for other options that yield more immediate results.

Why raising capital is not the only marker of success

– In the various discussions I have with entrepreneurs,I’m always surprised by the fact that many of themseem to describe raising capital as an end, and not a mean, as if raising capital were the ultimate success,the end of the road, or the time to move to a different project. Raising capital, whether you’re starting a business or trying to expand an established one, is actually the beginning of the road. Once you have raised the money, this is when the pressure is on, and you have to put your plan to action, report regularly to your investors on your progress, and deliver results.

Another big myth is that entrepreneurs that get funded get a big salary right away. Usually, it’s not really how it goes. The reason is that investors want to maximize their return on investment, and the less your company spends on your salary, and the more it can use the newly received capital to fund other activities,and maximize your chances of success. Getting a small or reasonable salary is a means for you to contribute to the success of the company by letting the capital be used for other needs.

Also, you need to remember that at that point, you should still have a significant part of the shares of the company, and therefore, that you’re sitting on the virtual pile of money, if only if you’re able at some point to sell some, or all of your shares for a real pile of money. So, raising capital is in itself a great achievement, since it means that you have successfullyarticulated your vision to investors, and convinced them to bet on your team and your project, but it’s just a first step of a much longer journey.

 

Marketing your project

– As there are more and more web sites dedicated toconnecting entrepreneurs looking for capital and investors, there’s a growing trend of entrepreneurs posting their business plans on those web sites and waiting for investors to contact them in return. I think that that’s quite a dangerous strategy, if you’re really serious about raising capital in a timely manner.Technology has evolved in it’s facilitating the connection between entrepreneurs and investors, but the way capital is raised today is still done the old way.It’s much more about networking, being in the right circles, and getting the support of big and small investors.

Don’t throw away just yet the old ways of doing business. There is great content out there about building a professional network that can be applied in the context of meeting investors. For example, you can check out Dave Crenshaw’s course on Building Your Professional Network on lynda.com.

 

 

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