Funding your enterprise
All entrepreneurs will need to fund their venture sooner or later. Financial capital could be needed for funding product development, to pay employees, for investment in specific technology, or for scaling the business. The normal route is to secure funds from an Angel or Venture Capital investor. As an alternative, some recognized experts recommend looking for creative ways of financing the startup. Martin Zwilling, an established contributor to Forbes, wrote a post entitled “10 More Creative Ways to Finance Your Startup”. In this article he summarized Karlene Sinclair-Robinson’s ten top sources of financing, based on her own book. These are:
1) personal financing,
2) personal credit lines,
3) family & friends,
4) peer-to-peer lending,
7) vendor financing,
8) purchase order financing,
9) factoring accounts receivables, and
10) IRA financing. (Investment Retirement Account)
All of these sources are good and creative options for the management of a startup’s initial cash flow resources, but at a certain moment of the journey, when the startup is ready for the transition to become a full business, the entrepreneur may still need to share his/her venture with Angel or Venture Capital investors.
Different authors and experts talk about different phases of the startup funding process. Normally, seed-funding phase comes first. These funds typically originate from the entrepreneurs themselves, from alternative ways such as those mentioned above, or from crowdfunding efforts. This seed money allows the entrepreneur to build a skilled team, draft a business plan, and to start running the venture. Venture capital investors will appear and show interest in the entrepreneur`s startup after the journey has already started the take-off. In the short video “How to Fund a Startup”, the reader can see a five-phase process of funding a startup throughout its lifecycle.
Phase 1: Seed funding: Year 0: Entrepreneur funds, Friends and Family, Crowdfunding
Phase 2: Round 1 of funding : Year 1: Group of people (Venture Capital Fund) invests on the business (Hundreds millions) expecting to see the return in ten years’ time.
Phase 3: Round 2 of funding : Year 3: Group of people (VC funds) invests on a business doing well (tens of millions).
Phase 4: Expansion : Year 5: Funds coming from subordinated debts or preferred equity. Returns arriving.
Phase 5: IPO or Sale : VC ready for receiving the return. 700% return on their investment in companies which go public.