Objectives: Session 8 – Getting Financed

In this session you will use your startup costs and expenses from Session 7 to build a Startup Funding table. You will also learn about ways to finance a new business, and what works for what kinds of startups.

OVERVIEW

Many classes on starting a business talk about getting money from outside investors (venture capital). We will also talk about:

  • Most startups are self-financed (called “bootstrapping”).  A study made by Wells Fargo bank (2005) showed the average cost to start a business  in the U.S. is $10,000.
  • Owning a business yourself or having partners. If you can own it yourself, then you’re probably better off, unless you want to have partners to reduce risk and to bring in know-how and experience.
  • The amount of startup costs will depend on the business. For example, there may be little or no startup costs for a catering company or a portable lunch stand. The startup costs will be much higher for a high-end restaurant in a major urban location. The need for funding depends on these costs.
  • Types of funding for a startup can depend on how much money is needed, whether the investor feels there is a good rate of return from their money, and whether the company agrees with the terms.
  • More than 500,000 new businesses are started in the U.S. each year. Only about 5,000-6,000 receive venture capital per year.
  • Angel investors must qualify according to the SEC rules. Research has shown there are more than 200,000 angel investors in the U.S.
  • Getting funding from friends and family should be limited. There are a lot of legal restrictions. This type of funding  might work for tens of thousands of dollars, in some cases hundreds of thousands.

DEFINITIONS

Angel Investor: A person who invests his or her own money in a startup business who meets the SEC guidelines.

Bootstrapping: Starting a business by yourself, with no outside investors, with or without bank loans, credit cards  or other borrowed money.

Venture Capitalist (VC): A person or firm that makes business investments. A VC can also bring management and technical knowledge as well as money.

Business Valuation: What a business is worth. There are many ways to value a business, such as:

  • Asset-based valuation
  • Book value
  • Adjusted book value
  • Liquidation value
  • Replacement value
  • Earnings-based valuations