Saturday, December 4, 2010

The reality of finding finance for a new business

Finding business finance for your business plan is often much more challenging that what people may realise. Luckily us entrepreneurs are a hardy bunch and a few obstacles and challenges along the way will 99% of the time simply make us more determined. You will obviously have written a business plan by now and then the fun really starts. But you should not confuse a challenging financing process with a poor business idea which just simply does not deserve the funding you are looking for. Make sure that you have done sufficient marketing research to determine that someone else that you and your friends & family believes in the product and that will be a demand for the product once it gets to the market.

I am providing this information because so many people here post requests for funding to cover 2 to 3 years of product creation or R&D. Then when they are ignored, they get angry.

Let's look at the typical stages in a successful company's financing. Although there are rare exceptions to this sequence, in most cases it looks like this:

If you are realistic about what types of scenarios attract investors, you won't get angry. Instead you will work to create an opportunity that will be attractive to investors at every stage.

If you think that you are going to attract money to cover your living expenses and provide a bit of fun money while you create the product for 2 or 3 years, you are in for nothing but frustration.

-Seed Round
At this stage you have no more than an idea. You are going to build the next Facebook or Google or Apple...only it will take a year or two of work before there is something that can be sold. Or maybe it's a dull little business which excites only you?

So, who comes in at this stage if you should be lucky enough to attract any money? The answer is the "3Fs", otherwise known as Family, Friends, and Fools. Yes, this means your parents and rich frat buddies from your days at Harvard or Yale. What's that? Your family is not wealthy and you didn't attend an Ivy League college? In that case, you are going to have to finance your seed stage the most common way: with a day job.

-Angel Round
Angels come in with money when you have started selling. They jump aboard because you now have tangible proof of concept. You're finally walking your talk. It's no longer all just hot air coming from the founder. Be honest, talk is cheap.

-Venture Capital A-Round
VCs step in when the business looks like it has potential for an IPO or acquisition a few years down the road.

-Venture Capital B-Round
Wall Street is starting to take notice of the company. Therefore, the VCs want to maximize its forward momentum.

-Venture Capital C-Round
The IPO is now in sight and the C-round is used to "fatten the pig" as much as possible in addition to preparing the company for it. Often this preparation includes replacing management with C-level officers who are known to and respected by Wall Street.

-The IPO
This is the big pay-off at the end of years of hard work. It means liquid stock selling at, hopefully, a high P/E multiple. (The second best alternative is to be acquired by a large company such as a member of the Fortune 1000.)

Welcome to Planet Earth. That's how 99% of start ups get through the seed stage and if you are having difficulty in succeeding here refer yourself to the opening paragraph and assess into which category you fall. Best of luck as you will probably need it.

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