Does the funder expect feasible returns in a reasonable amount of time? If the funder will be offering advice and guidance, what experience do they have in your market? The lean startup is a philosophy that focuses on developing a minimum viable product and using business resources effectively. Lean startups are able to fund growth via sales to customers, thereby avoiding external funding.
Lean startup processes include building a product quickly, measuring customer response, and using these findings to improve the product quickly. The business establishes a customer base early, and is able to use sales to fund growth. Avoiding or delaying external funding via the lean startup or bootstrapping philosophies offers many benefits. Entrepreneurs concerned about these issues often choose to bootstrap their companies. These bootstrapped companies, also known as lean startups, avoid external funding until the business has a successful product.
Lean development focuses on a three-step process:. During the first and second steps, a lean startup focuses on conserving capital and maximizing profits. During the third phase, some lean startups look for external funding. These lean startups, particularly if they produce physical products, are excellent candidates for crowdsourced funding. In this business model, the first step is a business idea or customer solution.
The idea is prototyped, offered for sale, and refined. The company is funded by sales from customers, which are re-invested to grow the company and improve the product. Venture capital or angel investors are only sought to finance expansion once the company has a successful product. By contrast, a more traditional startup model begins with a business plan.
The entrepreneur then seeks funding. Product development rarely begins until the company is funded. Profits from sales to customers are divided among a variety of investors rather than re-invested into the company.
Traditional small businesses and lifestyle businesses, which grow slowly and are designed to support the entrepreneur, are better suited to bootstrapping. However, businesses with a novel business model and a large potential target market are good prospects for venture capital funding.
These risks can be mitigated by getting a better deal through increased transparency or reducing the amount of funding you need through lean start up methods. For general topics on how to plan and grow your startup, see the Startup Mentor section.
For specific details of how to launch and manage your startup in Singapore, see the Launch in Singapore section. Should you pursue funding for your startup? Ready to setup your company?
Types of Startup Funding Startup funding can be divided into four broad categories. Personal Savings and Debt. Business Loan. Family and Friends. Angel Investors. Venture Capitalists. Do You Need External Funding? Dilution of Equity. Loss of Control. Conflicting Goals. Protective Provisions. Ask Yourself. This is especially applicable for working capital.
Some entrepreneurs might prefer debt over equity as debt funding does not dilute equity stake. Venture Debt funds are private investment funds that invest money in startups primarily in the form of debt. Debt funds typically invest along with an angel or VC round. VC funds with larger ticket sizes in their investment thesis provide funding for late-stage startups. It is recommended to approach these funds only after the startup has generated significant market traction.
A pool of VCs may come together and fund a startup as well. The investor may decide to sell the portfolio company to another company in the market. In essence, it entails one company combining with another, either by acquiring it or part of it or by being acquired in whole or in part.
IPO refers to the event where a startup lists on the stock market for the first time. Since the public listing process is elaborate and replete with statutory formalities, it is generally undertaken by startups with an impressive track record of profits and who are growing at a steady pace.
Under financially stressed times for a startup company, the investors may decide to sell the business to another company or financial institution. The entrepreneur must be willing to put in the effort and have the patience that a successful fund-raising round requires. The fund-raising process can be broken down into the following steps.
The startup needs to assess why the funding is required, and the right amount to be raised. The startup should develop a milestone-based plan with clear timelines regarding what the startup wishes to do in the next 2, 4, and 10 years. A financial forecast is a carefully constructed projection of company development over a given time period, taking into consideration projected sales data, as well as market and economic indicators.
Basis this, the startup can decide what the next round of investment will be for. While it is important to identify the requirement of funding, it is also equally important to understand if the startup is ready to raise funds. Any investor will take you seriously if they are convinced about your revenue projections and their returns.
Investors are generally looking for the following in potential investee startups:. A pitchdeck is a detailed presentation about the startup outlining all the important aspects of the startup. Creating an investor pitch is all about telling a good story. Here is what you need to include in your pitchdeck. Every Venture Capitalist Firm has an Investment Thesis which is a strategy that the venture capitalist fund follows.
The Investment Thesis identifies the stage, geography, focus of investments, and differentiation of the firm. You can gauge the Investment Thesis of the company by thoroughly going through the company website, brochures, and fund description.
To target the right set of investors, it is necessary to research Investment Thesis, their past investments in the market, and speak with entrepreneurs who have successfully raised equity funding.
This exercise will help you:. Pitching events offer a good opportunity to interact with potential investors in person. Angel networks and VCs conduct thorough due diligence of the startup before finalizing any equity deal. If the due diligence is a success, the funding is finalized and completed on mutually agreeable terms.
A term sheet for a venture capital transaction in India typically consists of four structural provisions: valuation, investment structure, management structure, and finally changes to share capital.
Startup valuation is the total worth of the company as estimated by a professional valuer. There are various methods of valuing a startup company, such as the Cost to Duplicate approach, Market Multiple approach, Discounted cash flow DCF analysis, and Valuation-by-Stage approach. Investors choose the relevant approach based on the stage of investment and market maturity of the startup.
It defines the mode of the venture capital investment in the startup, whether it is through equity, debt, or a combination of both. The term sheet lays down the management structure of the company which includes a list for the board of directors, and prescribed appointment and removal procedures.
All investors in startups have their investment timelines, and accordingly they seek flexibility while analyzing exit options through subsequent rounds of funding.
The offering of any startup should be differentiated to solve a unique customer problem or to meet specific customer needs.
Ideas or products that are patented show high growth potential for investors. The passion, experience, and skills of the founders as well as the management team to drive the company forward are equally crucial in addition to all the factors mentioned above. Market size, obtainable market share, product adoption rate, historical and forecasted market growth rates, macroeconomic drivers for the market your plans to target. Startups should showcase the potential to scale in the near future, along with a sustainable and stable business plan.
They should also consider barriers to entry, imitation costs, growth rate, and expansion plans. Clear identification of your buyers and suppliers. Consider customer relationships, stickiness to your product, vendor terms as well as existing vendors. A true picture of competition and other players in the market working on similar things should be highlighted.
There can never be an apple-to-apple comparison but highlighting the service or product offerings of similar players in the industry is important. No matter how good your product or service may be, if it does not find any end-use, it is no good. Consider things like a sales forecast, targeted audiences, product mix, conversion and retention ratio, etc. A detailed financial business model that showcases cash inflows over the years, investments required key milestones, break-even points, and growth rates.
Assumptions used at this stage should be reasonable and clearly mentioned. A startup showcasing potential future acquirers or alliance partners becomes a valuable decision parameter for the investor. Initial public offerings, acquisitions, subsequent rounds of funding are all examples of exit options. Investors essentially buy a piece of the company with their investment. They are putting down capital, in exchange for equity: a portion of ownership in the startup and rights to its potential future profits.
Investors realize their return on investment from startups through various means of exit. Ideally, the VC firm and the entrepreneur should discuss the various exit options at the beginning of investment negotiations. A well-performing, high-growth startup that also has excellent management and organizational processes is more likely of being exit-ready earlier than other startups. Initial Public Offering is the first time that the stock of a private company is offered to the public.
Issued by private companies seeking capital to expand. It is one of the most preferred methods by investors to exit a startup organization. The Government of India formed a fund of INR 10, CR to increase capital availability as well as to catalyze private investments and thereby accelerate the growth of the Indian startup ecosystem.
Pop Quiz: If the denominator total outstanding shares is constantly increasing, and the numerator your of shares remains the same, does your percentage of equity increase or decrease?
Some shares of stock are issued along with special rights, designed to help investors maintain their percentage of ownership interest in the company. We dive further into preferred stock rights and terms in Chapter 2 of this guide. Often, startup founders, employees, and investors will own equity in a startup. Venture investors choose to invest in startup companies private companies because they stand to make outsized gains if the company goes public, or if another liquidity event occurs, such as an acquisition by another company.
Employees are often offered equity in the startup where they work as part of their compensation package; employees may elect to receive lower monetary compensation in exchange for a greater amount of equity in the company. In turn, equity serves as incentive for employees to stick with the startup as it grows, as their shares typically vest over a period time.
Chapter 1. How Startup Investing Really Works A few people get together and come up with an innovative solution to a common problem. This is where startup investors come in. Why do startups raise venture capital? What is equity? Equity essentially means ownership. What is the difference between stock, shares, and equity? New shares are commonly issued when: A new investment in the company occurs A new round of funding closes A founder or employee is issued shares as part of their compensation package The employee option pool is refreshed Pop Quiz: If the denominator total outstanding shares is constantly increasing, and the numerator your of shares remains the same, does your percentage of equity increase or decrease?
Who can own equity in a startup company? Previous chapter.
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