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Family, Fools and Friends, Seed Stage, Angels and VCs - Where the Money Comes From






"Many entrepreneurs start out at the concept stage by bootstrapping their startup themselves, or by turning to friends and family for financing. Once a startup grows beyond these initial resources, however, the entrepreneur ( faces the challenge of crossing ) the capital chasm to take the venture to the next level. "

We should all understand, nothing happens in a business - any business- until money finds its way to the table. It may take many elements to start a business- inspiration, creativity, innovation, shrewdness, the ability to spot a market while it is still a distant speck on the horizon - but one of the most important is money.

Without money, there is no computer to write on, no brochures to mail, business cards to hand out, or phones to solicit business. Money is the beginning and end of all business and the nourishment it feeds on, no matter how revolutionary, life enhancing, trend setting, or society transforming your business may be.

So, a good place to begin, when you are thinking of creating a business, or in any of the early stages of a business…which can be many years into it….. is where the money will come from.

Types of Investors

Different types of investors represent different sizes of investments which may correspond roughly with the stage of growth the company is in, and what phase of growth they need to finance.

Friends, Fools and Family: Pre-seed Money

Most businesses are started when someone decides to invest most or all of her savings, then either moon light, or borrow from a supportive spouse, friends or parents to keep growing the business until it is self sustaining. They believe in you and your vision and are willing to put their hard- earned cash behind you. Also, they have a personal relationship with you, and, through long experience, have formed the judgement that you can probably pull this off.

If, in fact, for whatever reason, you are not able to pull it off, they will probably love you anyway, and figure they had the pleasure of being in on the ground floor of something which could have been very big ,if the cards had fallen the right way. They still think you're great and very courageous to have tried it.

A pretty standard investment from a friend might be $10,000, just enough to get you started with postage stamps, copying equipment, and a few other basics. This is called pre- seed money.

The next step up the food chain is to angel investors.

Angels: Seed Money

Business angels are successful entrepreneurs, professionals or people with inherited wealth. They have a little extra money to put at risk, for a variety of reasons, which may include mentoring others, the thrill of the ride, or the desire to make money.

You must have a prototype of the business up and running to approach angel investors, who generally invest $50,000 to $500,000, with the average falling at around $250,000. Angels usually invest in groups of 2 to 5.

Angels invest in 50 times the number of deals venture capitalists invest in, which is a pretty good clue as where to look for money, at least in the initial stages of a business. Another differentiating factor is, angel money is very patient money, and they are willing to wait 3 to 7 years for a return on their investment. This is seed money.

There are probably active venture capital groups in your city. Ask your banker, lawyer or accountant to help you identify them, and, if possible, introduce you.

Venture Capitalists

Venture capitalists have only one goal, which is to make as much money as they can for their investors. They thrive on high risk, high return investments and have the capability of investing several million to 10s of millions of dollars and can accelerate your growth dramatically. ( In fact, they will insist on accelerating your growth, so be ready for it.)

Venture capitalist money comes from pension funds, wealthy individuals and institutional investors, all of whom expect to make money. Venture capitalists are usually looking for a significant market position in a particular space as well as a very high return on their investment. Remember, they are answering to investors, themselves.

Venture capitalists, or VCs are looking for a business which, in 3 to 5 years, will have $30 million in sales. They are targeting a large market size, and looking for a strong management team, a unique business model and a global business opportunity.

If you are not comfortable with any of these factors, or are looking for someone to be warm and fuzzy all the time, don't look for VCs. As mentioned, their only interest is in profit. If you're not making it, as expected, and on the time-table you've discussed, you are not just in the dog house, you are out of there, cut loose and left to your own devices. This is how a lot of dot coms who were told to burn through a lot of cash to gain market share fast, were suddenly left high and dry and cash-less. The VCs saw the market turn and decided to pull back, support their most promising, prize puppies and cut the rest adrift. As a result, many companies who could have been started and kept aloft with $1 million, but were given $10 million instead, with instructions to spend it all to reach a certain milestone, found, they had ramped up to a position of huge overhead which their cash flow couldn't support, and, without further venture capital cash infusions, they were dead men or women walking. And soon, they were just dead men, or women.

So, the bottom line is, seeking money from a venture capitalist is a high risk, high reward proposition for you. Be sure it's really what you want, and that you're ready for the consequences it can bring.

"Capital Chasm" Companies

A relatively new phenomenon are the companies which have been formed in the past few years to address the problem of the "capital chasm".

As one such company, SeedStage.com, put it:" Many entrepreneurs start out at the concept stage by bootstrapping their startup themselves, or by turning to friends and family for financing. Once a startup grows beyond these initial resources, however, the entrepreneur often is unable to cross the capital chasm to take the venture to the next level.

Most startups make the mistake of thinking that all they need is an introduction to a venture capitalist and money will be thrown their way."

This, as SeedStage.com goes on to point out, is far from the truth. Venture capital firms have mushroomed, and they have also grown in size and tend to invest in later stage deals. They can barely sift through all the business plans which cross their desk.

Companies like SeedStage.com act as intermediaries, taking on the task of grooming the company. It helps "to build its core team, validate the market, develop the value proposition and business model, forge alliances and service partner relationships, and refine the investor presentation. Once readied, the startup is introduced to a widening circle of investors targeting appropriate industry, stage, valuation, and investment level. " At the same time , the intermediary is assisting VCs in their screening process. Ultimately, an intermediary company, "brings together pre-screened and qualified entrepreneurs, mentors, investors, and service providers to facilitate funding and growth."

These companies make their money when a deal is consummated between a company and an investor. Although this will cost a company some stock, it could be money well spent, in that valuable time may well be saved in securing investment capital.

Other Investors

Corporate Investors

Corporate investors invest for strategic reasons. They may wish to reduce time to market, or eliminate industry competition. If your company offers a product or service which dovetails nicely with a large coporation, a merger or acquisition could be a very profitable way to take your company to the next level and also get a lot of sophisticated, high level support in running your business

Institutional Investors

Institutional investors may approach you before an IPO, or initial public offering. Their goal is to enhance their financial returns. They will only talk to you one or two times a year, and don't bring any added value, other than their investment to your company.

Only You Can Decide Where Your Money Should Come From

We know your family and friends believe in you, and there's a pretty good chance some angel investors will also.

A growing number of women are getting VC financing today and more VC firms have women on their boards.

The most important part of the funding process, initially, is to decide what's right for you. Do you want to bootstrap and be independent? If so, you may be happier doing that, and winding up with a larger piece of a smaller pie. But be aware that no in investor will put money into just you. They are too afraid you will be hit by the proverbial bus or struck by lightening. If, on the other hand, you are willing to work hard on your business plan, develop a team, and be mentored by the advisors you will take on with VC financing, then that is a way which may lead to fame and fortune, which is a pretty good head start toward happiness.

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