In this session you will complete a Start-up Funding table, based on your earlier estimates for startup costs and expenses. You will also learn the different types of financing available to help start a business, and what kinds of financing works for what kinds of startups.
OVERVIEW
While most entrepreneurship classes focus on the more sophisticated finance related to venture capital, we want to also look at what happens in the vast majority of the real world startups. Including:
- Most startups are self-financed, which is what we also call bootstrapping. I saw a study published by Wells Fargo, in about 2005, showing that the average cost of a startup in the United States is $10,000.
- We do not want to forget the difference between owning a business entirely yourself, and dealing with partners. Essentially, if you can own it yourself, then you’re probably better off. One exception to the rule is when you want to have partners for reducing risk, bringing in know-how and experience, and peace of mind.
- Most businesses have some level of startup cost estimates related to strategy. It’s much more about strategy than it is about requirements of the type of business. For example, food service startups run the gamut between costing almost nothing for some kinds of catering, to the startup costs of a portable lunch stand, to the startup costs of a small local restaurant, to the startup costs of an ambitious restaurant in a major urban location.
- Types of financing depend on several factors: first, the size of investment required; second, the desirability of the investment to potential investors; and third, the preference of the startup entrepreneurs themselves.
- Venture capital is limited to a few thousand (maybe 5K, 6K, something like that) new startups every year. These are very exclusive ventures, with proven management teams, defensible business models, good markets, and good product-market fit.
- Angel investors are generally organized and knowledgeable, and they qualify as investors according to the SEC. Some research indicates more than 200,000 angel investors in the United States. They invest amounts in the hundreds of thousands, generally.
- Friends and family should be very carefully limited because there are a lot of legal restrictions. These investments might work for tens of thousands of dollars, in some cases hundreds of thousands.
- Bootstrapping is doing it yourself, without outside investors, without sharing ownership, with or without bank loans, credit card financing, or other borrowed money.
DEFINITIONS
Angel Investor: An individual who invests his or her own money in an entrepreneurial company.
Venture Capitalist (VC): A person or investment firm that makes venture investments, and are expected to bring managerial and technical expertise as well as capital to their investments.
Business Valuation: What a business is worth. Types of valuation include:
- Asset-based valuation
- Book value
- Adjusted book value
- Liquidation value
- Replacement value
- Earnings Based Valuations
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