Trapping
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By: More articles by gretcheng
Many entrepreneurs start out at the concept stage by bootstrapping their startup themselves or by turning to friends and family for financing. Once a startup grows beyond these initial resources however the entrepreneur ( faces the challenge of crossing ) the capital chasm to take the venture to the next level.
We should all understand nothing happens in a business any business until money finds its way to the table. It may take many elements to start a business inspiration creativity innovation shrewdness the ability to spot a market while it is still a distant speck on the horizon but one of the most important is money.
Without money there is no computer to write on no brochures to mail business cards to hand out or phones to solicit business. Money is the beginning and end or all business and the nourishment it feeds on no matter how revolutionary life enhancing trend setting or society transforming your business may be.
So a good place to begin when you are thinking of creating a business or in any of the early stages of a businesswhich can be many years into it.. is where the money will come from.
Types of Investors
Different types of investors represent different sizes of investments which may correspond roughly with the stage of growth the company is in and what phase of growth they need to finance.
Friends Fools and Family: Preseed Money
Most businesses are started when someone decides to invest most or all of her savings then either moon light or borrow from a supportive spouse friends or parents to keep growing the business until it is self sustaining. They believe in you and your vision and are willing to put their hard earned cash behind you. Also they have a personal relationship with you and through long experience have formed the judgement that you can probably pull this off.
If in fact for whatever reason you are not able to pull it off they will probably love you anyway and figure they had the pleasure of being in on the ground floor of something which could have been very big if the cards had fallen the right way. They still think youre great and very courageous to have tried it.
A pretty standard investment from a friend might be $10000 just enough to get you started with postage stamps copying equipment and a few other basics. This is called pre seed money.
The next step up the food chain is to angel investors.
Angels: Seed Money
Business angels are successful entrepreneurs professionals or people with inherited wealth. They have a little extra money to put at risk for a variety of reasons which may include mentoring others the thrill of the ride or the desire to make money.
You must have a prototype of the business up and running to approach angel investors who generally invest $50000 to $500000 with the average falling at around $250000. Angels usually invest in groups of 2 to 5.
Angels invest in 50 times the number of deals venture capitalists invest in which is a pretty good clue as where to look for money at least in the initial stages of a business. Another differentiating factor is angel money is very patient money and they are willing to wait 3 to 7 years for a return on their investment. This is seed money.
There are probably active venture capital groups in your city. Ask your banker lawyer or accountant to help you identify them and if possible introduce you.
Venture Capitalists
Venture capitalists have only one goal which is to make as much money as they can for their investors. They thrive on high risk high return investments and have the capability of investing several million to 10s of millions of dollars and can accelerate your growth dramatically. ( In fact they will insist on accelerating your growth so be ready for it.)
Venture capitalist money comes from pension funds wealthy individuals and institutional investors all of whom expect to make money. Venture capitalists are usually looking for a significant market position in a particular space as well as a very high return on their investment. Remember they are answering to investors themselves.
Venture capitalists or VCs are looking for a business which in 3 to 5 years will have $30 million in sales. They are targeting a large market size and looking for a strong management team a unique business model and a global business opportunity.
If you are not comfortable with any of these factors or are looking for someone to be warm and fuzzy all the time dont look for VCs. As mentioned their only interest is in profit. If youre not making it as expected and on the timetable youve discussed you are not just in the dog house you are out of there cut loose and left to your own devices. This is how a lot of dot coms who were told to burn through a lot of cash to gain market share fast were suddenly left high and dry and cashless. The VCs saw the market turn and decided to pull back support their most promising prize puppies and cut the rest adrift. As a result many companies who could have been started and kept aloft with $1 million but were given $10 million instead with instructions to spend it all to reach a certain milestone found they had ramped up to a position of huge overhead which their cash flow couldnt support and without further venture capital cash infusions they were dead men or women walking. And soon they were just dead men or women.
So the bottom line is seeking money from a venture capitalist is a high risk high reward proposition for you. Be sure its really what you want and that youre ready for the consequences it can bring.
Capital Chasm Companies
A relatively new phenomenon are the companies which have been formed in the past few years to address the problem of the capital chasm.
As one such company SeedStage.com put it: Many entrepreneurs start out at the concept stage by bootstrapping their startup themselves or by turning to friends and family for financing. Once a startup grows beyond these initial resources however the entrepreneur often is unable to cross the capital chasm to take the venture to the next level.
Most startups make the mistake of thinking that all they need is an introduction to a venture capitalist and money will be thrown their way.
This as SeedStage.com goes on to point out is far from the truth. Venture capital firms have mushroomed and they have also grown in size and tend to invest in later stage deals. They can barely sift through all the business plans which cross their desk.
Companies like SeedStage.com act as intermediaries taking on the task of grooming the company. It helps to build its core te