Entrepreneurship and how to get funded

Exploring the options

Welcome to entrepreneurial finance. This set of posts will provide you with practical information on funding, VC relations and all the way up to making an exit. Enjoy!

First of all, a personal note from me: Hey! :)

If you are working on your idea and are in need of funding, congrats! Everyone (either they say it or not) appreciates your work. And I know that there are lots of money floating around and that even the dumbest ideas get funding, but if I could summarize this post in one line it would be — think twice before you start looking for funding. There is a golden rule that says “Raise less, raise later, but never run out of cash”. Let me tell you why, starting from the basics.

You are in the phase of building your product or service and need some cash, but also mentorship. Business Angels fly to the rescue. These are individuals that invest from 10k to 250k and that have most probably been entrepreneurs themselves. They are in it for the excitement and the profit (don’t worry — they realize that profits most likely will never come). Be prepared to give a significant chunk of equity — depending on the stage of your company, it might be of up to 30%, if early stage. Reward-based crowdfunding is also a great option in my opinion if you need only cash. But be careful, Venture Capital firms (VCs) are allergic to equity crowdfunding! There is a perception that if the entrepreneur does not want to take VC or angel money, than he is reluctant to learn and get outside support.

The differences between angels and VCs are very simple. The former invest smaller amounts in earlier stages, make quick decisions and are more involved in day-to-day activities. They also tend to have broader investment horizons, as compared to VCs, who are more and more focusing on verticals. If you would like to learn more on what is VC and how the whole industry was formed, I suggest you to watch the movie Something Ventured.

Now, let’s talk money. How exactly are you expected to raise capital from VCs?

As a starting point, bear in mind that VC money is expensive. It is not a must, and if you can borrow at a lower cost, think twice. Moreover, raising from VCs is the toughest. In the end, it is not their money. VC firms go out and seek funding from LPs (Limited Partners) who are wealthy individuals or institutions. These investors commit cash or equivalents for a time period of usually 10 years, in the end of which they expect a significant return. VCs charge a usually 2.5% management fee on the fund and receive a carried interest that is 20–30% of the profits. Here’s how it goes for the typical VC fund:

Once VCs invest in your company they will expect an exit strategy to take place after 3–5 years depending on your stage. So think twice. Explore other options and evaluate the need to give equity for smart cash.

If you want to go into more depth, check out the next post :)

Also, please feel free to drop me a comment below.