Join Rudolph Rosenberg for an in-depth discussion in this video A common sequence of events, part of Entrepreneurship: Raising Startup Capital.
- There's a common sequence of events to finding the capital you need for your company. I mean, after you have evaluated how much money you need and that you've done everything you could to make it the smallest amount possible. The common sequence is the following. First, fund as much as possible with your own money. Second, get as much loan money as your company can afford to carry. Third, get the rest of the capital you need through equity or in other words, the sale of shares. The logic behind the sequence of events is that as an entrepreneur you're interested in maintaining as much as possible, control and ownership of your company.
As any entrepreneur in his right mind, when you have an awesome project, that you know you'll be successful you'd rather split the profits with as few people as possible. That logic means that you would want to investigate every possible way to get the capital you need without sharing the ownership of the company at all if possible and as little as possible if there's no other choice. Of course, in your particular situation you could consider that it's well worth giving away a large portion of the ownership but you will be likely to reach that conclusion once you have done everything you can not to do it and ultimately decide to do so because that's the most probable way of being successful at raising the capital you need and get your project going.
So, this sequence, first start with your own money and that includes any money that you won't have to give back at all. It includes any savings you have, any money given to you by family members for example. The second step then is to secure one or more loans. The great thing about loans is that you know from the beginning how much it's going to cost you and for how long. No one is going to interfere in your day-to-day management of the company.
The downside to loans is that you usually need to start repaying right away and that creates an obligation for your company from day one. You therefore need to grow your business as fast as possible to have the means to pay those loans. Once you have exhausted all of the above you're pretty much left with finding investors those can come in many forms, such as Venture capitalists, or business Angel's for example. They will lend you money and you won't have to repay a dime in the short term but the flip side, is that they know own a piece of the company as well, and you therefore have to report back to them regularly, agree with them on key decisions, and of course split the profits once you have some.
This is the reason why it usually comes as the last option. Rare are those entrepreneurs who are looking to have a boss.
- List three variables that will affect the source of capital you choose to fund your company.
- Identify the best strategy most entrepreneurs can use for finding capital and investors for their company.
- Name two elements an entrepreneur must consider when determining the amount of capital their business will need.
- Cite two details that should be included in a business plan to help investors become familiar with what they will be funding and the term of their investment.
- Explain what the JOBS Act did to facilitate crowdfunding for entrepreneurs.
- Summarize the typical characteristics of an angel investor.