Investment Capital for the Start-Up Companies

28 Sep Investment Capital for the Start-Up Companies

According to Noam Wasserman’s book The Founder’s Dilemmas…

“To Survive and grow, start-ups need human capital, social capital, and financial capital. Core founders who lack any of these three often try to attract co-founders or hire employees who can provide what is missing. Sometimes that works. But for many founders, the start-ups financial capital needs exceed the capital they can provide, and lead the founders to seek outside funding.”

During this blog, we will discuss various funding sources and how they might impact your business.

Self-Funding:

Depending on the size of the start-up many new businesses are either partially or fully self-funded. Norm Wasserman states that 77% of founding teams have at least one founder who contributed start-up funds to the organization. However, businesses that only have personal start-up funds tend to bring with them an added potential risk as those funds tend to run out quickly. According to the author the median sized company will have a “burn rate” of $75,000 per month (chapter 9) and that most companies will burn through their start-up cash within 4 months. That leaves companies with the need to look towards Investors for additional cash flow.

Investors:

1. Family and Friends: Investors from family or friends (usually friends with a long term relationships) are often what make a start-up possible in the first place. Scott Cook, of Intuit, took loans from his farther. Although these investors are crucial they do come with limitations as friends and family often times lack any industry knowledge or expertise that will help the company grows.
2. Angel Investors: These people refer to a wide range of individuals who invest in an organization but who have not had a previous relationship with the owners or founders of the new start-up business. These people tend to invest at an earlier stage in a company’s life cycle than other investors like Venture Capitalists. These angel investors put more emphasis on getting a good financial return from their investments than people in the friends and family investment group. In some cases these individuals can also serve as business mentors which is an added benefit to the young growing company.
3. Venture Capitalists: These investors focus full-time on investing in high-potential start-ups. Their level of professionalism is quite high. They expect to receive business plans from the founders of start-ups and they will take those plans and evaluate them on paper as well as in person. They will also perform a lot of due diligence and negotiate investment terms on the front in of their relationship. The Venture Capitalists raise their capital form limited partners, many of which are large businesses, large foundations, public pensions, and university endowments and similar organizations. The Venture Capitalists are fiduciary responsible to report back to the limited partners. For their efforts they receive a management fee ranging from 2% to 2.5% of the assets. This investment group is very motivated to prioritize financial gains as quickly as possible by whatever means they deem necessary. The most common reason that Venture Capitalists leave an organization is when the start-up is purchased by a larger company ex. When Google bought FeedBurner.

No matter which funding choice you choose it still remains necessary for new organizations to bring funds in order to get their start up off the ground. Each choice comes with pros and cons and the decision should be made after much consideration and thought.