From Boozing to "financing an entrepreneurship !! ...
This write-up is based on the article "Giving Ideas Wings" from "The Economist". If you have a subscription to the magazine I would recommend you to read it as it gives some insights into financing aspects of starting a firm.
Things like what are your likely sources of capital for starting out a venture and what are the problems that entrepreneurs face during this time and probably some hints on where/whom to look out for …. May be this is not very exhaustive but it will certainly help you get started..
The high risk that a VC takes in funding a start up is often accompanied by setting ambitious commercial objectives—milestones, as they are known—and complex provisions to protect the value of their shares. If things do not go according to plan, company founders can quickly end up losing their voting rights and even their jobs as the VC's have opportunity costs involved in choosing this venture over another.
Here is what I found useful from the article:
- Apprehensive Investors
The risk of becoming out of pocket and faced with unproved business plans makes the investors (VCs) apprehensive in investing into a start-up venture. On an average 3 out 5 ventures die due to lack of finance to get the business off the ground and to sustain in the longer run. I guess this a good enuf reason for them to be apprehensive !!
- Equity Gap:
The article defines a term called "Equity Gap" which exists in this era as the Venture Capitalist firms have expanded so much that they usually don’t show much interest in funding the start-up's unless they find huge worth of the business.
Apparently this was never a problem about 10 years back as VC firms used to fund businesses even if they find reasonable profitability in the business.
So where do the entrepreneurs get financing to get the business rolling?
- Early stages of financing …How long do they last ??
Early stages involves the owner's credit cards and other precarious kind of investments which are of course limited. Then comes family and friends … Unfortunately there is only one family and limited # of friends ..so this might last for a month or so … then where do u turn to ?
- Who are angel Investors ?
Then come into picture these "Angel Investors" … These are probably the high net worth individuals who are rich and are prepared to invest in a risky venture.
- Well, before reading the article I used to think that this kind of financing is very rare but the #'s projected in the article seem to suggest that this is a huge market which the would-be entrepreneurs can tap into to finance their dreams ! Then at a later stage they can turn into VC firms to get things going ...
- Since VC firms are usually critical of these Angel Investors the entrepreneur has to be extremely careful in selecting the Angel Investor as a clash of intentions would lead to end of dream (lead to bankruptcy) for the entrepreneur.
- Advantages and Pitfalls of choosing an Angel Investor
- Pitfall :
Inquiries about the investor have to be made and everyone has to be sure what every investor wants from the business so that it doesn’t lead to any kind of disaster in the long run.
- Advantage:
Since the Angel Investor usually has specialized knowledge in the industry he/she would usually end up helping the entrepreneur to find customers and use his experience in guiding the owner.
They have organized themselves into networks to invest in different ventures so as to spread their risks… If you read the complete article you might find some links to them in the industry you are venturing into !!
If you want to know how much money did the investors of Skype made and how many VC firms rejected to fund its seed capital ….you'll get it in this article !!!
…hopefully u'll find the article interesting !! This is one source i got to know ..If you happen to know any other source of funding .. plzz feel free to post it in the comments section ... !!
