Class 5 Flashcards
Benefits of equity financing:
Equity funding provides funding in exchange for ownership. Investors contribute knowledge and expertise, or network/connections/resources.
Important tips of seeking investors:
Not all opportunities investment worthy, investors want substantial returns.
Avoid seeking investors as long as possible, start looking when you expect to not be able to do it without them or competitors will leave you behind.
Your business will increase in value as you grow it.
Equity considerations:
If investments help you grow your business at a faster rate than you have to give up, your portion will be worth more. If you give up too much ownership, you may be kicked out of your own company, you may have skills to enact change but not to manage and grow the business. As you give up ownership you give up strategic decision, hiring decisions, subsequent investments.
Stages of equity funding:
Seed funding—early investment to prove a proof of concept.
Startup financing—money provided to implement an idea by funding product research and development.
Early-stage financing—larger funds provided for companies that have a team in place and a product/service tested or piloted but have little or no revenue.
Series funding—subsequent round of large, later-stage VC investments to fund rapid growth.
IPO or mezzanine—listing company for sale through a public stock exchange.
Equity investor types:
Friends, family, fools—typically $1,000-$100,000, may provide loans without equity or invest in exchange for ownership, convertible debt where short term loan is used and turned into equity when future financing is issued.
Angel investors—investors who uses their own money to provide funds to young startup private businesses run by entrepreneurs who are neither friends or family.
Venture capitalists—funds consisting or limited partnerships, vest from $500k upwards, conduct formal due diligence, exit with returns to funds partners.
Who are angel investors:
Accredited investors who earn more than $200k per year or have net worth of more than $1million. Often self-made entrepreneurs who want to make additional money but share their knowledge and expertise by mentoring future entrepreneurs. Most effective way to find an angel investor is through professional networking.
5 types of angel investors:
Entrepreneurial angels—experienced entrepreneurs, willing to take risks, provide mentorship.
Corporate angels—former business executives, looking for ROI or paid position in new venture, may clash with startup culture and highly controlling.
Professional angels—professionals from other fields, commonly silent investors, may want to become paid advisors.
5 types of angel investors cont.:
Enthusiast angels– independently wealthy, retired, hobby, typically hands-off.
Micromanagement angels—experienced entrepreneurs, looking for hands-on involvement.
Angel groups:
Angels who collaborate to review opportunities and make larger investments.
What angel investors want:
Your product is developed or near completion. You have existing customers or potential customers who will confirm they will buy from you. You’ve invested your own dollars and exhausted other alternatives including friends and family. You can demonstrate that the business is likely to grow rapidly and reach $10million in revenues in 3-7 years. Business model is in top shape.
Who are venture capitalists:
Professional money managers who are also looking to make 10x their investment in 5 years, investments typically $1 million, later stage investments, tend to specialize within single businesses. They are looking for the right team, “an A team with a B idea instead of a B team with an A idea.” VC’s can work independently or in groups. VC firms have full-time professionals who help conduct due diligence and manage investments.
Be prepared before meeting with VC’s:
If the first impression doesn’t go well, you won’t get a second one. VC’s job is to access whether you are knowledgeable and prepared. VC’s review 100+ businesses per month. Due diligence process can take several months.
Reasons why investors will say no:
Negative founder or team dynamic. Insufficient skills in the founding team. Dishonesty and unpreparedness. Trying to do too many things at once. Negative/neutral professional references. The ask is too much money for not enough equity. Poor business pitch. Licensing/IP issues. Unclear value proposition.
What are most investors looking for:
Market conditions, competition, market opportunity, founders, social proof, value addition, potential for return, unicorns.
What should you look for in an investor:
Credibility of investor, organization fit, past behavior in investing, autonomy, availability, contracts.
