There are a variety of sources for entrepreneurial financing. A typical start-up seeks sources of funding for its business during five different phases that are part of the business’s development. The typical Entrepreneur will formulate an idea, and then finance this research and the initial stage of market research using his own funds. He will then look for “FFF” investors who may finance his business idea an amount, let’s say the example of $15K.
A fast-growing start-up could be able to find the help of an Angel Investor after 3 months in the process and earn $200K. Then after another 6-12 months, they could be seeking a second $2 million from a Venture Capitalist.
Before we talk about financing, it is crucial to remember that starting an enterprise with the traditional model and using “Entrepreneurial Funding Sources” is not the only option to achieve success. Businesses like Mailchimp as well as others had success by using their profits to finance their expansion, which is more often referred to as bootstrapping.
In a nutshell, this is the way Entrepreneurial funding Sources operate. It starts with a pie. It’s the idea you have in your head, your ideal for your business. It’s a tiny pie, however, it’s yours to keep. You decide you’d like a bigger pie, but you don’t have the right components (cash in this instance) to achieve it therefore you seek the assistance of your friends.
In the beginning, you invite someone from your family or a friend to contribute some money to make the pie bigger. You then give an equal portion of your portion to the person in your family who provided the cash.
You decide next that you want to take a bigger slice of the pie and look for additional entrepreneurial funding Sources such as Angel Investors as well as Venture Capitalists who provide the money needed to buy a slice of the pie. Your portion will decrease, but the total pie is significantly larger and you actually get more of the pie (Remember that we’re talking about cash). talking about).
Then you should make the pie for the public, as that means everyone has the possibility of supplying ingredients – yes cash – to ensure that your pie is expanded to its maximum size. Every pie investor will get a piece of the pie, and your portion of the pie could be small but will be worth an enormous amount in… pie.
In terms of technicality, the 5 stages of sources of funding are:
This is the reason why the concept is yours all by yourself. The company is yours to own. business and have nothing you can share with anyone other than you. Family/Friends Stage This stage permits you to solicit smaller amounts of money from friends and family. The average amount of money will be between $10-15K and investors can be expecting a 5% part of the business. This stage is commonly called the FFF or friends, family, and fools stage as it’s a high risk to invest in a company in the early stages, but the rewards are usually impressive.
Two trends in investment are beginning to emerge in this era of entrepreneurial funding sources. We are seeing the development of business accelerators and incubators as viable alternatives to direct investment. The benefit of these funding options is that they not only offer cash but offer collaborative workspaces as well as business advisors to work with. The cost is high at around 10%- 15 percent for a $250 investment however, the opportunity to collaborate with these business advisors is worth the equity by itself. The other option is to invest straight out in which an angel investor could make a contribution of anywhere between $200K and $1 million, with the median of $600Kin 2012. (Source: Halo Report) With an average equity share of 15 to 25% of the company. This is the kind of investing that happens on television shows like Dragon’s Den which is a personal favorite of mine.
The moment when things start to become serious. Venture Capital can have multiple rounds and each is a portion of equity. Venture capitalists generally invest more than $500K and are more likely that it will be within the multi-million dollar price range to make them feel exuberant. They’ll value their piece of the pie based on an expression of the company’s net worth multiplied by the sum they’re investing i.e. an estimated valuation of $4 million for the company that includes $2 million, the company is valued at $6 million after investment. So the VC anticipates getting a 33% stake in equity.
An IPO is in fact a method of raising capital for the business. The company is publicly listed and anyone can buy shares in the business including parents and children investors who stayed away from investing in the first place because they believed it was risky.
So, in the end, Entrepreneurial funding sources are simple with common sense. They’re a method to increase the amount of capital you have available to your business to expand. You’ll have to give up equity in the process to every one of the Entrepreneurial Funding sources, but the purpose of this sacrifice is to get more and more of the pie when the pie grows.
Simon Maselli is a world-recognized business consultant for Metamorph specializing in business innovation Simon has more than 20 years of experience working on international business and projects building profitable businesses, as well as offering advice on the subjects of Entrepreneurial Leadership, Innovation, and Sustainability for Corporates. He is known for his inspirational communication style and his repertoire of innovative, practical, and highly effective solutions to the challenges that technology-orientated companies face in today’s business landscape.