there are many reasons why companieslook for capital those companies can be startups established companies or noteven companies yet but just business projects they can be online orbrick-and-mortar companies they can be technology companies or more traditionalones but the one thing that those companies share is the fact that they’retrying to achieve something and they need capital to achieve it thatsomething is usually a self-contained project or in other words a project thatis specific in nature and that is time-boundfor example the development and launch of a product is a self-contained projectthat could require capital that the company does not have the companytherefore has either the choice of waiting until it has enough money todevelop and launch the product or to look for capital in order to do thedevelopment and launch as soon as possible some projects can wait to bestarted when you have the money and other projects simply need to be startedas soon as possible before the opportunity disappears for a businessproject although it looks like it could be different even that the companydoesn’t exist yet it is pretty much the same thing a business project is acompany that has not started yet and has its founder as its one and only employeeit usually needs to develop and launch its first product and to do that it justneeds more things than an established company already has such as office spaceor employees in essence a new product in the new business is pretty much the samewhen it comes to raising capital some of the reasons companies raise capital arethe development and launch of a product that requires significant funds upfronta good example would be if you decide to develop a new product then need toproduce a certain quantity of it and store it until it is sold the cost ofall those steps can add up to a significant amount and thereforerequiring you to raise capital or to overcome a significant barrier to entryin a market this can for example be seen in the biotech or pharmaceuticalindustries where you need to do a lot of research before you get to a productthat can be solved and even then that product needs to go through many typesof approvals and certifications before it can be put on the market or also theneed to grow the company at a very fast pace to gain a strategic benefit frombeing the market leader let’s take for example a company that sells a productto the banking industry then the company has a quite low number of customers itcan sell to once its product is ready for launchthe company could need capital in order to put together a sales team that cantake over the market as fast as possible before the competition gets in thebenefit here would be to build a stronghold that would be very difficultto take over for any given competitor you need though to be careful to alwayshave a time bound element to the reason you’re raising capital even if thedeadline is very far in the future an error sometimes made by entrepreneurs isto build a company that requires regular injections of cash in order to survive akey element to the success of business is ultimately to be profitable andself-sustaining which means that once the project forwhich you’re raising capital is delivered then your company should beable to continue to thrive on its own there is no one strategy to raisingcapital there are many strategies and each one of them is unique to yourpersonality your business and the stage of development your companies in if youread the business news you might be used to seeing a lot of articles aboutventure capitalists investing millions of dollars into businesses but venturecapital is but a part of the capital investment landscape there are manyother sources of capital and each has its set of benefits and limitations butfirst it all starts with you as an entrepreneur for example how easily canyou share information about your company with the outside world without beingafraid of having your idea stolen some of the strategies out there involve afair amount of information sharing with potential investors to be able to tapinto those sources of capital you need to share your vision why you believeyour business is going to succeed and your business model which in other termsmeans how you’re going to make money we have a tendency to overrate the risks weface by sharing our business ideas but nonetheless you have to assess howcomfortable you are with sharing vital information about your business if thisis a big no-no for you then you need to build your strategy using sources ofcapital that allow you to share little to no information about your businessthen the type of business you will be running makes a big difference as wellif you’re looking to start an online business your funding needs will be muchlower than if it’s a brick and mortar business online businesses require verylittle capital when compared to the relatively limitless return it canprovide if on the contrary you’re looking to open a shop you’re going tohave significant upfront investments to make and will therefore have to tap intomore sources of capital if you start a consulting firm which is pretty much abusiness around your main competency that can be started as soon as you havebusiness cards in a computer for that type of business you might actually noteven need any funding and the sole investor is going to be you if on thecontrary you decide to manufacture product andsell them online or through distributors then you will have to secure enoughcapital to get the initial inventory and store it somewhere there are manydifferent types of sources of capital out there and depending on what type ofentrepreneur you are or business you’re in and at what stage of development yourcompany is in you’ll see that there are a number of paths you can take there’sno right or wrong answer to how to raise capital for your business but there arebetter fits depending on your unique situation when it comes to sharing our ideas withother people many of us have the tendency to overratethe true risk of doing so when I have a good idea I have the reflex of wantingto keep it to myself as if I was taking the risk of losing it to a potentialcompetitor just by talking about it in reality there are very little chances ofthat happening and for very logical reasons of course I’m not saying thatyou should tell everyone about your idea just because there’s very little risk ofit being stolen but nonetheless there is no reason to keep it only to yourself tothe point of hindering your development efforts first it takes a big even amassive effort to start a new business and out of all the people who happen tohave a good business idea or hear of one for that matter only a tiny portion willactually think about doing something about it maybe only 1% and out of that1% maybe just another 1% will actually do something about itso if we quickly do the math here that means that only one person in 10,000 youare going to be telling it to could actually do something about it whichmeans that if you talk about your plans within your circle of friends or to yourfamily the probability of each resulting in someone stealing your idea is veryclose to zero my conclusion here is that there is no true reason to hold back andnot share with your friends and family about what you’re trying to achieve thenyou could tell me that you will talk about your project to potentialinvestors who have the means to steal your idea and actually are looking forideas here again I don’t think this is a true representation of how things workinvestors are actually not looking for ideas investors want to invest inbusinesses that have the idea and have demonstrated their ability to turn theinvestors money into ten times what it’s worth if you see a great entrepreneurcoming with a great idea why would you go through the trouble of findingentrepreneur to do the same thing isn’t that a pure waste of time if you needinvestments do share your ideas and business plan with investors and by theway we don’t hear so much about investors putting together teams orbusinesses around an idea the simple reason is that this is actually the jobof the entrepreneur himself not the investor when someone is an investorthat means he wants to see the whole package not just the idea third even ifyou were to tell your idea to that one person in 10,000 or that to thatone-of-a-kind investor who wants to steal your idea then what’s the worstthing that could happen you’ll just have a competitor in front of you once yourbusiness is thriving you’ll attract the eyes of many individuals and companiesthat will want to get a slice of your market competitors will pop up allaround you and only the fittest will survive so what difference does it makethat you get that first competitor a bit earlier than anticipated we all tend tonot talk about our business idea because we want to be the first to hit themarket but being the first to market is barely an advantage okay you might get afew more sales at the beginning because you’re the first to offer that productor service but very quickly as competitors join you in offering thatproduct or service you will most likely have no benefit left from having beenthe first even worse being the first is sometimes a big risk as you invest a lotof money on an idea that has not been tested yet for which the market couldnot be ready some of us just have the vision a bit too early and take a biggerrisk of failing and in that case being the second one or actually the third onein the market is actually sometimes an advantage because you get to see whatyour competitors are doing right or wrong while I’m not saying that youshould walk around with a sign on your back explaining your business model Idon’t think either that you should hold back from sharing it with investors ortelling your friends and family about it raising capital takes time not aninfinite amount of time but it usually takes a few months between the time thatyou put together your business plan define your capital search strategystart meeting with potential investors secure the deal and get the funds it caneasily take six to nine months what that means is that if your business needsthat capital to start its operations you’d better think twice before you quitwhat you’re doing now at least until you know in approximately you’ll get thefunds it also means that raising capital is rarely the solution to solve anurgent problem if you need capital right away to save your business or to startit fast to solve a personal situation then you’d better look for other optionsthat yield more immediate results in order to raise capital successfully Ithink it’s important to understand who investors are and what they’re lookingfor when they review business plans I of course won’t be trying here to give youa one-line description that will cover all the types of investors given thateach person is unique and has his or her own objectives in way of thinking thereare though common traits to many of them which every entrepreneur would be wiseto take into consideration the first thing is that despite what peopleusually think most investors are all wearing successful entrepreneurs or hada very high profile job in a large organization many of them have been inyour shoes starting projects raising capital and they know exactly whatyou’re going through they also know what it takes to being a successfulentrepreneur they also have seen their share of businesses that failed in ourarea of business plans that are too optimistic enough entrepreneurs who aretoo confident and not ready to hear their feedback their feedback is veryvaluable because investors usually have a great deal of experience starting abusiness and raising funds you should definitely hear what theyhave to say you could be saving tons of time and blunders by listening to andimplementing their feedback there is one thing they all have in common theyinvest in your business to make money which means getting more money down theroad that they have invested at the beginning and they will not be lookingonly at your revenue projection which will surely be optimistic but also atwhat you are going to spend the money on and when you spend it because those areelements of your business that you can play with and secure and maximize returnon investment investors all have their unique characteristics and goals butremember to keep the investors point of view in mind as you’re pitching yourproject or idea to them you before you even start meeting withinvestors you need to have the answer to this key question how much capital do Iactually need to answer that question you actually need to have a very goodunderstanding of how your company is going to make money how it’s going toacquire and retain customers how much upfront investment is required how muchday-to-day expenses you’ll have any investments you need to make along theway how fast you start seeing your first dollar coming in and last how long willit take for your customers to pay you once you made those cells with answersto those questions and some simple math you should be able to come up with ananswer one thing you need to keep in mind though is that you’re going to needmuch more than your initial investment apart from the original investment thereare two things that weighed heavily on your capital needs the first one is thesalaries you have to pay including yours and the second one is the time it willtake to sign your first customer and get paid if you already have a customerthat’s a great way forward and a great way to reduce your capital needs there are four big sources of capitalwithin which we can fold all the usual sources we know such as crowdfundingventure capital business angels loans and so on those sources are thefollowing your own money when you’re coming from the operations of yourcompany debt and equity let’s look at each one of those in detail let’s startwith your own money the first question we need to answer is why are we talkingabout your money when in the first place you’re following this course tounderstand what other sources of money there are there are three reasons why weneed to talk about your money the first reason is that we talk about your moneywe talk about any money you can get through your own means or can get fromyour family so in that sense it is money that you will have to ask for just asyou would do with investors you don’t know the second reason is that you haveto put your money into the project if you want to have credibility whenmeeting with investors if you don’t put your money into your project then howcan you expect anyone else to put any money as well how can you convinceanyone if you have not convinced yourself the third reason is that manyentrepreneurs don’t pay themselves for a few months and when they can afford itit can even last for more than a year and in essence since they have to paytheir personal expenses with their savings for example you can considerthat it’s just the same as investing money into the company and using it as asalary so if you work for your own company and don’t pay yourself anysalary or just a very small one and need to compensate with your savings forexample then you can consider your investing money into your businessanother great source of capital is the operations of your company in short ifyour company generates a profit you can use that profit to fund your businessand therefore need less money from outside investors many entrepreneursstart their company when they found their first customer and can thereforedramatically reduce their capital needs so the key idea is to keep in mind herethat the earlier you’re calm he turns a profit and the less capitalyou will need next in line are deaths usually people don’t like to have deathsbut for a company when you can afford it it’s a great way to find capital withouthaving investors interfering with their business decisions contrary to theequity option that we will see in a minute with that it’s just like theregular loan you can get for your personal needs you know up front howmuch you get and how much you will pay back therefore there are no surprisesthe downside is that you’ll have to start paying back from almost day onewhich will weigh heavily on your finances so the more you’ll rely on debtthe more you have to generate revenue fast and in sufficient quantity to paythose monthly repayments the last big source of capital is equity equity meansselling share from your company me in exchange for the capital you are lookingfor you could for example sell 40% of your shares for $1,000,000 you wouldthen have the million dollars you need and will remain the owner of 60% of yourcompany the upside here is that there is no monthly repayment and the investor isin the project with you for good or bad the downside is that since the investoris looking to make a big return on his investment he will be participating tothe decisions you make at least the key ones and will have a say in yourstrategic choices the other downside is that you don’t know in advance how muchmoney you will pay back for that investor money the investor himself willbe entitled to a portion of your profits and down the road it could add up tomuch more than you originally received from him so you’d better be sure thatthis money is really needed and that you are really getting a great deal you’llalso want to make sure you have tried every other option before resorting togiving away your shares depending on your specific situation you’ll have toconsider tapping into one or more of those sources of capital deciding whichone to use and when is strategy you have to define one thing you could wonder andrightfully so is to know if you’re better off raisingall the capital you need in one go or doing it step by steplet me guess once would be better of course most people would think thatlet’s imagine you’ve prepared your business plan and you know you need ahundred thousand dollars to start your business then it just sounds logical tofind that amount and if you get it now it’s even better since you’ll didn’t beable to focus on your business and not raising capital every other week theonly thing here is not only do investors prefer to invest step by step but it’sactually better for you let’s take the example of raising capital throughequity or in other words the sale of shares of your company since you areselling shares of your company then the higher the price of your shares and themore money you will get same differently the higher the price of your shares andthe less shares you have to give away for the amount of capital you arelooking to raise so the higher price of your shares and the better off you areif your company is successful which you definitely should be planning on then astime will pass the value of your company will increase and therefore the value ofyour shares will increase as well so technically the more you wait beforeraising capital through equity and the better deal you’re getting the onlyproblem is that sometimes you need money right away to get started so instead ofasking for all the money you need maybe you should ask only for a portion of itwhich will get you to give away less shares and will give you the time youneed to raise the value of your company and sell some more shares but much lessthan with the other raising all at once plan so potentially instead of raising 1million dollars with 40% of your shares you could raise half a million dollarswith 20% and later on another half a million with only 10% or maybe even 5%so in the end getting the same 1 million dollars for 25%your shares instead of 40 let me tell you why investors prefer to do it bystep as well first and as we’ll see later on some investors specialize incertain maturity levels for companies some investors do seed investing whichfocuses on real startups that are barely starting some in the development ofstartups that have proven that they have a profitable and sustainable businessmodel so some investors will be interested to do only a portion of theway with you and offering them the opportunity to invest in a single stepwill open more doors for you another reason is that your company will grow bystages for example there could be a product development phase which mightnot even generate any revenue and will focus on putting a product on the marketthen it could be followed by a sales phase focused on getting a certainnumber of customers and becoming profitable the third step could be amarketing one with a focus on getting the world to recognize you so that atleast some of the cells come from people or companies wanting to work with yousome investors will be interested to work with you on only one of thosephases and sometimes bring with their capital their skills and the networkwhich will help you grow the company in short investors like to invest by stepsand they call those steps milestones there’s a common sequence of events tofinding the capital you need for your cup company I mean after you haveevaluated how much money you need and that you’ve done everything you could tomake it the smallest amount possible the common sequence is the following firstfund as much as possible with your own money second get as much loan money asyour company can afford to carry third get the rest of the capital you needthrough equity or in other words the sale of shares the logic behind thesequence of events is that as an entrepreneur you’re interested inmaintaining as much as possible control and ownership of your company as anyentrepreneur in his right mind when you have an awesome project that you knowyou’ll be successful you’d rather split the profits with asfew people as possible that logic means that you would want toinvestigate every possible way to get the capital you need without sharing theownership of the company at all if possible and as little as possible ifthere’s no other choice of course in your particular situation you couldconsider that it’s well worth giving away a large portion of the ownershipbut you will be likely to reach that conclusion once you have done everythingyou can not to do it and ultimately decide to do so because that’s the mostprobable way of being successful at raising the capital you need and getyour project going so the sequence first starts with your own moneyand that includes any money that you won’t have to give back at all itincludes any savings you have any money giving to you by family members forexample the second step then is to secure one or more loans the great thingabout loans is that you know from the beginning how much is going to cost youand for how long no one is going to interfere in your day-to-day managementof the company the downside to loans is that youusually need to start repaying right away and that creates an obligation foryour company from day one you therefore need to grow your business as fast aspossible to have the means to pay those loans once you have exhaustedall of the above you’re pretty much left with finding investors those can come inmany forms such as venture capitalists or business NGOs for example they willlend you money and you won’t have to repay a dime in the short term but theflipside is that they now own a piece of the company as welland you’d therefore have to report back to them regularly agree with them on keydecisions and of course split the profits once you have some this is thereason why it usually comes as the last option rare are those entrepreneurs whoare looking to have a boss a central element to the entire processof raising capital is having a business plan to present to investors so let’squickly go over what a business plan is and what it should include this is avery large topic and not just present briefly what a business plan contains abusiness plan is a document that you can either share in printed version orelectronically which provides not only an overview of your business but all theelements required for someone completely external to your business to be able tounderstand it it’s a complete overview of your business both from the insideand the outside the inside of course is about you and your team your product andservices your strengths and weaknesses your strategy and your ambitions fromthe outside it’s the market you’re in what your customers need what problemsthey have and that you’re going to solve it’s also who your competitors are whatthey’re offering and how they answer to the problems you’re trying to solve ifthey actually do there are sections that are common to all business plans andthose are an executive summary which is a two pages max document that is verywell written and sums up all the key elements of your business but moreimportant who creates the excitement of investors so that they want to get incontact with you to get you to present your business in more detail investorsusually first review executive summaries before they ask for a complete businessplan a company description which explains who your company is what itstands for and where it is on the path to its mission is it still just aproject on paper or have you started are you alone or with the team have youstarted doing real business you need to bring the investor here up to speed onwhere you are with this company you also need a market analysis let’s be clear onwhat the market is the market is where customers and companies meet and ismaterial by the sale of products and services youcan represent the market with words by describing the profile of your customersare they teenagers in the workforce senior citizens a minority who yourcompetitors are are they proposing low-end products or high-end ones arethey selling another version of your product or an alternative product suchas tea for example when you compare it to coffee and it can be represented innumbers through the total number of dollars spent by customers over a fullyear buying that product you could be targeting for example a 1 billion dollarmarket which would mean that over a full year all of the people who buy yourproduct or a similar product have spent together 1 billion dollars then describethe product or service you’re going to offer what problem it solves whycustomers will need it how is it different from what already exists onceyou have covered all of those elements comes the time to talk about yourselfand your team who you are what skills you have why you will be the rightperson to make this project successful ideally be able to show that you’re notdoing this for the first time but if you are what shows that you will besuccessful at it then you’ll have to present yourselves and marketingstrategy while concrete actions you will be taking to make things happen andignite sales and show that you won’t be waiting for customers to come in andlast a business projection showing the financial impact of your entire planwhich by the way will have to show why you need the money you’re trying toraise in any case preparing a business plan has many virtues it will help youdefine the building blocks of your plan and assess what it takes to besuccessful you should prepare it just as much for yourself as for the purpose ofraising capital it actually is the first step of your journey you in this course and when you are raisingcapital in general you’ll be talking nonstop about the value of your companythis is a critical element of raising capital and especially when you’reraising capital with equity when doing so you are in short selling shares ofyour company in exchange for the capital you need by doing so you therefore areleft with less shares and are not anymore the only owner of the companyfor example you could be raising $1,000,000 for 35% of your shares thatwould mean that after you successfully raised those 1 million dollars you willbe earning 100% minus 35% of the company or in other words we’ll be left with 65%of your company and your investor will own 35% of the company the big questionthen is how many shares would you be giving for the money you want and thatquestion is answered with the valuation of your company once you and theinvestor agree on the value of your company then you know the value of 100%of your shares if you divide it by 100 then you know the value of 1%if for example you agree that your company is worth $1,000,000 then if youdivide it by 100 then you know that 1% of your company is worth $10,000 in thatcase if you need to raise $100,000 then all you need to do is give away as manypercentages as needed until you get to that amount in this particular exampleyou need to give 10% so the more your company is worth and the more shares youkeep and the process of estimating the value of your company is called thevaluation of your company so everyone is interested in the valuation of yourcompany and the entrepreneur you and the investor need to agree on the valuethere is no one way to value a company there are many ways and everyone has adifferent opinion on the best way to do it so be ready to negotiate exchange ofpin verify numbers because that’s going totake some time as you might guess it’s in the best interest of the entrepreneurto have a high value for his company and in the interest of the investor to valueit low at the end this needs to be a win-win so it’s important to debate andfind a value for the company that seems realistic for both the entrepreneur andthe investor my stuns are another big thingthat you need to put in place in your plan it is critical to the process ofraising capital but on top of that it’s an excellent way to manage thedevelopment of your company the concept of milestones is to break down thedevelopment of your company let’s say for example the next three to five yearsin two phases and the end of each of those phases will be one of yourmilestones for example if you have a software company then you could imaginethat the phases could be phase one getting the basics together to start thecompany during which you would define how your company will operate in itsearliest stage how you will test your market and get the elements you need todetermine that it’s worth your while to dive into the project the end of thatphase is your first milestone phase two would be product development in thatphase you will focus all your efforts and those of your team if you have oneon the development of a version of the software that is advanced enough that wecan hit the market it doesn’t mean that you’re not doing all the smaller thingsthat need to happen within your company but the big thing of the moment isgetting your software ready the end of that phase is your second milestonephase 3 would be sales and marketing plan now that you have the basicstogether you have a software or an app to sell you should definitely have astrong plan to get people to buy it to get excited about this talk about it andmake it financially successful the end of that phase is your third milestone inthis example there are three phases in three milestones the reason why phasesand milestones are so important to raising capital is that it will enableyou to raise capital to fund those phases one by one by splitting thecompany’s development into phases ended by milestones you actually packageyour company and its development in a way in to individual companies that helpinvestors know when he is supposed to exit and sell his shares to potentiallyanother investor who will fund the next phaseand therefore the milestone is the time at which the investor is expecting tosell his or her share so break down your plan into milestones so that you can bespecific with your investors about what they’re funding with their capital howit will change the value of the company and what is the exact time at which theywill have the opportunity to exit this investment opportunity you in this course we will talk a lotequity and it’s important to understand the difference that is simply what youknow it is is borrowing money from an individual or an institution and payback that amount with interest once the loan is paid back you and the lender caneach go your own way and never meet again no strings attached it’s a way ofcourse to raise capital since raising capitaldespite the fancy name is just about getting the money you need to be able todo the things you need to be done equity is quite a different way to raisecapital in this case you get money all the same from people or institutionswhich are giving in exchange a portion of your shares and therefore a portionof the ownership of the company the immediate upside is that there isnothing to pay back not now not later but the flipside is that your newbusiness partner can have a say in the management of the company and get ashare of the profits all in all it can be much more costly than alone since youhopefully will make a lot of profits which you will have to share there is nolimit to the profits you will be sharing whether it is $1 or $1,000,000 or evenmore the investor will get a percentage of it all the same there are upsidesthough to this such as getting a business partner or a mentor someone whowill bring advice and his network and even potentially customers based on thepercentage of the company he owns he will have a smaller or bigger say intothe company decisions someone owning only 10% of the company will not havemuch of a say or any ability to make decisions but if that person has 50% ofthe company this person can pretty much decide what the company will be doingthe only way to part with an investor is if he sells his shares back to you or toanother investor another important note is that when you sell shares to investorto get capital you can define what those sharesand titled the investor to do this is for example important when sellingshares to someone close to you such as friend or family those arepeople who might not necessarily bring the advice and mentorship Network andcustomers you would expect from regular investors along with the money they giveyou you can therefore seldom shares that give no voting rights which means thatthey can claim a portion of the profits of the company as every other investorbut will have no way to make decisions for the company or participate in itsstrategy other than trying to convince you to do something a great thing withequity is that you can do a lot of things with it and define exactly whatthe investor is entitled to but on befouled investors know exactly whatthey should be getting so you need to be just as savvy on the subject using your own money such as savings tofund your company or project is the first and foremost plain and simple mostlogical way to start raising capital you raise your own capital you should likethat option because it will first be a great way for you to get a much betterreturn on investment than any other investment out there it’s a great way tostart your company without sharing any of the control and ownership of thecompany just yet and for investors it’s a way to showthat you believe in yourself and in your company and that you are not afraid tobet on yourself on the opposite side if you manage to get in front of investorswithout having invested a single dollar on your project then those investorswill rightfully question why they should invest in your project if even you arenot willing to do so or worse that you have not been able to save a fewthousand dollars to get it started putting your own money into your companyis a sign to everyone that you believe in what you’re doing that includes yoursavings and any money that you can get from your family for example to help youstart your business it is in short any money that you can get that you won’thave to repay in this video we will review two optionsavailable to many people which put your personal well-being and the well-beingof your relatives in danger but which still are part of the capital landscapeand therefore deserve to be described at least for completeness the first one isabout maxing out your credit cards to get the capital you need I might noteven need to explain the concept here of using your credit card to pay foreverything you need to get your company started those loans usually carry veryhigh interest rates and are long and difficult to repay if things don’t go asplanned and you need more time than expected to sign your first customer orif customers take more time than expected to pay you for your servicesthen those loans will put a lot of pressure on you very fast and inaddition to worrying about how to sign more customers you’ll be splitting yourtime between getting your company going and finding ways to pay back your loanyou could be putting your credit rating at risk as well with all theconsequences that come with it the second one is called a home equity loanthis is a loan that you can get if you own your home and have paid back aportion of the loan depending on the value of your home and the amount that’sactually left to repay the bank could be inclined to grant you another loancalled a home equity loan in for example your home is currently worth $100,000and that you have $60,000 left to repay then you should be able to get a loanfor up to 90 percent of the difference between the two and in this particularexample you could get more than $30,000 to invest in your business the downsideof this loan is that if you fail to repay your loan you could lose your homethere are many safer ways to raise money which we will be reviewing together inthis course you so what is crowdfunding crowdfunding asits name States is a way to raise capital for your company through a largenumber of investors that’s very different from the traditional way ofraising money which is done through a small number of wealthy investors or aventure capital firm individually each investor called in this case a backerwill invest a relatively small amount of money but collectively it can representtens of thousands of dollars or even hundreds of thousands of dollars in thiscase investors are called backers because they’re actually not investorsin the case of crowdfunding at the moment of this recording people thatwant to put money on your project cannot do it as investors for legal reasons andhave to make donations instead which are usually rewarded by a gift or a limitededition product entrepreneurs and backers meet on funding platforms whichare websites dedicated to putting in contact potential backers withentrepreneurs some of the most widely used web sites are Kickstarter calm andIndieGoGo calm on those web sites you can create a project profile which youwill use to market your company and product with the objective of attractingbackers and motivating them into giving you the capital to make your project areality there have been some huge successes in the field of crowdfundingand one of the most well-known is the people ePaper watch this is the story ofan entrepreneur who needed to raise $100,000 and ended up getting 10 milliondollars from backers on Kickstarter of course that’s an extreme example of whatcan happen when you raise capital using crowdfunding but it’s also an examplethat it can be very successful and get to the capital you need and as we willsee crowdfunding is best serving very young companies that have a limitedconnection to the investment world you one of the first ways people usuallyconsider to raise money is to turn to their friends and family to lend themthe capital they need to start their company it often sounds like a greatidea because those people are easily accessible and want to see a happy andsuccessful but the nature of the relationship itself and the fact thatthose people are so close to you is actually what makes it the mostdangerous ways to raise money when you raise funds through professionalinvestors everyone knows what the stakes are what the potential upside is and ofcourse the hard reality that 80% of all startups fail eventually and that thereis a very real risk of losing your entire capital and friends and family itis actually quite different their motivation to invest in your business isactually related to the fact that they want you to succeed or to send you themessage that they believe in you and want to support you in yourentrepreneurial efforts they might even be reluctant to give you their opinionif it’s negative so as not to demotivate you or have you thinking that they’renot supporting you usually it even goes one step further which is that friendsand family can be reluctant to do any paperwork to formalize your agreementwhen you’re in that first phase where everything is still possible everyone isvery happy you’re getting the money and your friends and family are happy tohelp you but usually things get complicated further down the roadthe question is what happens if your company meets difficulties and you’renot able to repay the loan is that going to be an issue if your company files forbankruptcy do you expect to repay the loan anyway those are all questions thatneed to be answered upfront when you’re dealing with an institution all of thosethings are set in stone as soon as you sign the contract you know who isresponsible for the loan what will happen if you miss a payment and thefull consequences of not being able to repay the loan with friends and familyyou need to have the same level of rigor in the borrowing process and define allthose things the benefit of doing so is that if things do turn sour then thereis no relationship or family issues added on top since it will all have beendefined in advance for example if you’re having temporary difficulties you needto define how you will handle it will you stop the monthly payment for a timeuntil your finances are better is your lender okay with that and does he havethe financial stability required to live without that money if your company filesfor bankruptcy will you be repaying the loan or not and if so would it be okayfor your lender to wait until you have a new source of income to repay the loanwill they accept a smaller monthly payment over a longer period of time andeven if you do remember that those people are your friends and family andthey might therefore have an opinion on how you use your money for example theycould be okay to reduce your monthly burden and take it on themselves to letyou repay the loan over a longer period of time but they might also feel bad ifthey see you going out or on vacation instead of paying them in an acceleratedway you of course might feel like this is a well deserved night out or vacationbut chances are they will see it in a very different light they might feellike they’re financing your vacation those are things you need to take intoconsideration when borrowing money from friends and family getting the money isusually the easy part but the consequences down the road can beterrible so what’s the best way to borrow money from friends and familyfirst you need to treat them like strangers as far as paperwork isconcerned don’t fall into the trap of believing that oral agreements aresufficient just because you know each other then protect their interestsbetter than they will as I said earlier they will not want to protect their owninterests so as not to lead you to believe they mistrust you so you have todo the job and in cyst on putting everything on paper goover every possible outcome and then put in writing the way you will manage it itis so important that I will say it again put everything in writing don’t rely onyour memory or theirs to know what was originally said and by the way even ifwe all had good memories we also all have different interpretations of whatwe say putting things in writing helps a lot in clarifying the agreement even ifthat document might not have a legal value it will be a great way to preserveyour relationships borrowing money from friends and family is a dangerous gameif you must do it to get started or if there is no other way to get yourcompany on its way then do it but put it all in writing and defend the interestsof your friends and family as your own in this video we will be covering twohave Investor dead-straight debt and convertible debt straight that is thebasic loan that you and I are used to getting for our personal needs the moneyyou borrow is to be repaid over a certain period of time or at the end ofthe period with a certain level of interest rate that’s a great way to getcapital easily and if your company has a certain level of revenue and is lookingfor capital in order to launch a new product or start operations in adifferent state or country for startups this type of loan is usually accessibleonly if you’re personally responsible for the loan and repay it even if yourcompany fails otherwise banks are usually reluctant to lend money tostartups given the high level of risk banks tend to prefer safer investmentswith a very very low probability of default for startups the best way to geta straight loan is to borrow from friends and family but we’ve alreadycovered this point previously a convertible debt is different fromstraight debt only in the fact that there is an added element in thecontract that states that the lender can either receive his money back withinterests or the equivalent amount in shares of your company at a certainpoint in time very concretely you get the money you pay nothing every monthand at the end of the loan period let’s say three years or five years you eitherpay back the total amount gieux interests included or give sharesfor a total value equal to the amount you it is normally expected that thelender will convert to the debt into shares when the time comes this debt isthen actually halfway between a debt and a sale of equity the way it works isthat the loan usually runs until you get to the next round of investment or to asignificant milestone and at that time the person that lends you the money canget shares for an amount equivalent to the money that was given to youa discount to compensate the lender for the risk he has taken so for example ifyou sign a convertible loan for $100,000 you could have a 7% interest rate withthat loan so that if the lender needs to get his money back then that will be theterms on which you would pay that back to him if on the contrary the debt isconverted into equity then he will be getting shares of your company worth$100,000 plus the discounts that was negotiated at the beginning in thisexample let’s say 15% you have to remember though that for a convertibledebt to work you have to be able to get to another round of funding or to themajor milestone you agreed upon if your company does not meet that milestonethen technically the lender could ask you to pay back the loan and force youinto bankruptcy if you’re not able to pay back so why would you be interestedin using convertible debt first because it’s much simpler to get then regularinvestment money for regular rounds of funding you need to value your companyin order to define how many shares investors will get for their money inthe case of convertible debt this discussion is postponed to a later timewhen you know better the second reason which is tie to the first one is thatbecause you will postpone the valuation discussion you will usually strike abetter deal and give away less shares when you are starting your company it issuper hard to determine the value of your company and when you give shares inexchange for money so early on you’re never sure if you’re getting a greatdeal at that time you will always feel like you’re getting a great deal becauseyou so much need that money to get started but down the road when you seehow your company was successful and you’ll have all the elements needed tovalue your company correctly then you’ll have the final answer as to if it was agood deal or not for example your company could be waymore successful than you anticipated and in that case great chances are thatyou’ll have given away more shares than you should haveso convertible debt gets you the money all the same but you get to value yourcompany when you know better which is great the Small Business Administration is agovernment entity whose purpose is to help small businesses to grow and thriveone of their activities is to help small businesses get loans people usuallyrefer to it as SBA loans but that’s not exactly how it worksthe SBA does not lend money per se to small businesses it rather providesguarantees to financial institutions so as to reduce their risk and facilitatesmall businesses access to loans the way it works is that if your company iseligible the SBA will take responsibility for a large portion ofyour loan and if your company cannot paint anymorethe SBA will pay back the amount on which it took responsibility in somecases its responsibility can go up to 80% of the loan which is very high thatmeans that when a bank evaluates a loan for a company that is eligible forsba-backed loans then the risk the bank is taking is really on only 20% of thetotal amount in concrete terms if you borrow $100,000 from a bank andthe SBA guarantees 80% of it that means the bank will be able to getback up to $80,000 from the SBA if you default and it’s risk is therefore ononly $20,000 out of the total loan in essence for the bank then it is as ifthey were considering giving you a much smaller loan and it becomes thereforemuch easier for your company to get it of course since the SBA is agovernmental entity and is putting taxpayer money at risk it is requiring alot of information before it decides to back a loan it can therefore beadministratively intensive for intrapreneur some of the requirements tobe eligible are to be working for profit to have looked for other sources ofmoney before turning to the SBA including youyour own personal money for at least 10% of the amount you are requesting topresent a business plan and financial projection in order to articulate whyyou need the capital to have no debt obligation towards the US government andfor them to be able to take back the equipment you bought you with the loanif necessary to recover as much money as possible if you default there are otherrequirements and you can find all the details on the SBA website at sba.
Govthose I think are all very valid requirements necessary to ensure thatthe taxpayer money is well managed the second area the SBA is active on inrelation with our topic here is the SBIC or the small business investmentcorporations the SBICs are private organizations that areregulated by the SBA they invest in businesses and usually focus onspecialized areas for example on companies that have a socially oreconomically disadvantaged to ownership to know more about SBA loans the bestnext step is to go to the sba.
Gov website which is very well designed youwill find information on things like the 7a programs or the 504 programs and theSBA AC programs those are the programs we have just described and since theychange regularly that’s the best way to get fresh information angel investors also called businessangels are very wealthy individuals who invest their own money into start-upcompanies usually at their earliest stage they are accredited investors butmost of them are not professional investors there are successfulentrepreneurs people who held high management positions in leading firmsand sometimes just wealthy people angel investors invest in startups for manyreasons it can be as a hobby a way to stay active after having retired butalso a willingness to promote entrepreneurship by helpingentrepreneurs in other cases they invest because they believe in the project andwant to be part of the potential next big thing they all have at least onething in common they invest their money to get a significant return oninvestment they invest in companies in their infancy when it’s not clear yetthat the company will be successful in its market and sometimes even before ithas earned its first dollar many angels specialize in certain fields or marketbased on their own experience one of the big difficulties when you invest instartups which we will see is also shared by venture capitalists is thatyou invest in companies that are supposed to have a game-changing productand to be able to understand the potential of that product you have tohave some experience in that market so it’s only logical that investors focuson fields they know so that they can have a solid opinion on the potentialfor success of the companies they invest in now let’s talk about the types ofinvestments angel investors get into usually they tend to invest individuallybetween $25,000 to $200,000 per deal which is usually insufficient in itselfangel investors therefore group around the deal to invest together amounts thatrange between $100,000 to $1,000,000 and on average they invest as a grouparound half a million dollars per dealer angel investors are the stepping stonebetween the funding you get through your own means plus debt and venture capitalcompanies that approach angel investors usually have a specific project theyneed to deliver such as developing a product to the point that you can hitthe market or put in place the structure the company needs to generate largescales of revenue it’s those kind of big milestones that angel investors arelooking to fund so that upon their completion the company can have its nextround of funding potentially with venture capital in this first video on venture capital Iwould like to set the scene of how venture capital works from a high-levelstandpoint I think it’s important to understand who the key stakeholders areand what venture capitalists also called VCSactually do outside of investing capital into startups a venture capital firmusually operates on a 10-year cycle during which it will go through fivesteps each fund has a limited lifespan and successful VC’s raise and run anumber of funds over the years the first step will be for them to raise capitaljust as you will be doing but lots more of it with an average font size of ahundred and fifty million dollars then VCS will start reviewing and investingin deals such as potentially yours the next step is to make sure things go asplanned by participating to the management of the companies theyinvested in usually as being members of the board then comes the time to harvestthe return of their investments by exiting the companies they invested inthrough the sale of their shares and the last step is to return the funds withthe expected return on investment to the original investors the ones thatprovided the original one hundred and fifty million dollars let’s look now ateach step in more detail the first step is when V sees themselves raise capitalto constitute the fund they will be managing during the following ten yearsthe boss of the VC firm is also called the general partner he is the leader ofthe firm and will be working with his team to raise capital exactly the sameway you will be doing it the big difference though is that his job ismuch more difficult since he is not raising money on a specific project butrather on his ability and the ability of his team to identifyinvest in and cash out from business deals that should prove in the futurevery rewarding but have not been identified yet as you’re probablyguessing one of the key factors is going to be the past experience andachievements of the general partner and his team which will make that processpossible the general partner and his team will beraising capital from what is called limited partners limited partners areusually either very wealthy individuals corporations or pension funds and all ofthem are looking to make a very big return on investment by investing in thevery risky business of venture capital they are calledlimited partners because the loss that can incur if all fails is limited to theamount of money they have put into the fund not more you might rightly say thatthis is already a huge potential loss but still it’s not the same as beingresponsible for the money and potential liabilities that could arise from theoperations of the company you invested in the fund is constituted on the basisof a number of potential limitations that are contractually agreed with thelimited partners such as the field or industry in which the money will beinvested the development phase of the projects or companies investing in forexample in early-stage companies or at different maturity levels the timeframethat the VC firm has to run its operations for example it could be setto a total of 10 years which would require the VC firm to return thecapital and the return on investment to the limited partners at the end of a10-year period whatever the outcome is so the first year of the life of thefirm is dedicated to securing the capital the firm will be managing forthem this tells you as well that VC firms aretargeting specific businesses and you should therefore make sure that you getin contact with those firms that are interested in companies that have thesame profile as yours once you have identified those VC firms you can startthe process of getting in contact with them you one thing we all need to realize is thatthe job of the VC is very different from most of our jobs in one sense at leasttheir job is very visible and super risky and if things don’t go as plannedand if the firm does not generate the expected return for its limited partnersa general partner and some of his team may not be able to raise another fundmost of us can live with blunders in our careers those are not communicatedpublicly and chances are they’ll just be a small bump in our history but for VCSit’s quite different this is plagued our career with each fund they run and a fewpeople will remember past successes when a big failure comes so why is it soimportant to understand that when raising capital through venturecapitalists well simply because there is not much room for error on the VC sidewhile at the same time they play a very risky game VC’s investing companies areexpected to be game changers in their field through technology drugdevelopment and so on game-changing companies are therefore alone in theirfield since not every company can be groundbreaking most companies follow thehard and one-of-a-kind every few years will come with a great new concept ortechnology and change the game for everyone else that means that VC’susually review and invest in companies that propose new products and servicesand that those same visas need to be able to make the difference between theidea that will not succeed the one that will barely succeed and the one thatwill be really game-changing for its industry to do so VCS will look intoevery aspect of their work to reduce their risks as much as possible in thehope of maximizing their chances of delivering the promised returns to thelimited partners to do so they will focus on industryis where they have extensive experience and understand what it takes to besuccessful what problems are latent and require new technology and theyunderstand where the market is going then most of them will invest incompanies that have attained a certain level of maturity and will have proventheir ability to generate revenue and sometimes lots of itsometimes the maturity factor will not be the revenue generated but whenthere’s a big problem in an industry and that a company is planning on bringing asolution the big uncertainty will be in their ability to develop the productthen the factor that will determine the maturity level will be the level ofdevelopment of the product and if for example the biggest hurdles have beenpassed successfully they will look as well for massive markets where thecompany has a lot of room to grow they will look at business models that scalewhich means that once those businesses have passed the time of initialinvestment their revenue will grow much faster than their cost of operations andoutside of reducing their risks the visas are also pragmatic people they arenot dreamers and they not only take into consideration the odds of success ofcompanies they actually factor it in their model they understand that 80% ofall startups fail and so that despite all of their efforts knowledgeexperience and methodology they will most likely be wrong 80% of the time ormaybe just 70% of the time thanks to all the things they do to beat the odds sothey know that out of 10 companies they will invest in only a small portion willbe successful they go even further and assume that out of 10 companies 4 willbe an utter disaster and just go bankrupt and on which they will lose alltheir capital and their expected return on investment another 3 will barelysurvive and generate enough money to pay for its expenses or at bestbe profitable but in a much smaller market than expected and therefore withno potential to be a big success and here again they might get back theircapital but definitely not generate any return then about two companies shouldbe successful be well positioned in a big market and make up for the losses ofthe other seven companies and last they hope they will have one super successfulcompany the likes of Google or Facebook in their portfolio which will have thembe way more successful than they originally planned that also means thatas we’ve just seen out of ten investments VCS make they really expectonly three of them to be successful and make up for all the losses of the otherseven companies they invested in the issue is that at the time of theinvestment they have no idea which one is which the rule is then thereforesimple each company they invest in should yield a potential success andtherefore be expected to generate a return that will make up for all thefailures of the other companies and so when people would usually expect 20% or30% or even 50% return on investment VCS will expect a 10x – 30 x-factor thatmeans that they invest in companies that they believe can be worth after five toseven years from ten times to 30 times their original value that’s ten times -30 times that means they’re not looking for good companies not for potentialsuccessful companies they are looking for potential googles or Facebook’s inevery project they review because it’s only by doing that and being wrong seventimes out of 10 that they will be able to deliver on their commitments to thelimited partners you in short the venture capitalists youwill meet will be looking for a certain number of things before they evenconsider investing in your business first you’ll have to be solving a bigproblem in a big market in a growing market a big problem means somethingthat people cannot live with in our eager for you to solve the question iscan people live with the problem if the answer is yes then that means theremight be difficulties selling a product as people will not have the urgency andcould be reluctant to change their habits then you’ll have to be well onyour way either from a revenue standpoint customer acquisitionstandpoint or product development standpoint with a great number ofuncertainties lifted as to the potential success of your company you’ll have toknow the VC process like the back of your hand know what a term sheet is whatit contains what our due diligence materials there are great books outthere that detail all the specifics which you need to know even before youstart speaking with VCS the VC will be looking for a strong team everyone knowsthat the team makes the success of the company not the rest it might seem a bitextreme but it’s the truth there are countless example wherecompanies with similar products have had very different successes with some ofthem becoming market leaders and others disappearing altogether and evencompanies deemed unsuccessful who were turned completely around by a great teamso the team is what makes the difference it is the people who will be able toface problems and turn them into opportunities as mentioned earlier youwill have to demonstrate your ability to multiply by at least tenfold the valueof your company over the 5 years after the investment is made and last but notleast you need to be very clear up front on your exit strategy and how the VCwill turn his stakes in your company into a massive return if that’s throughan acquisition you should already know who are the topfive companies you expect to be acquired by you.
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