Published on January 13, 2014
Entrepreneur’s Secrets™: How to Fund Your Venture! Hicham Zinalabdin Jan 13, 2014
What is the “Fund” problem?
Funding Source Key Points 1. Options and Sources can be mixed and matched (No hard rule). 2. The sequence is recommended based on: a. Dependencies b. Benefits and strategy to owner(s). 3. This is about increasing venture’s assets not optimizing (decreasing) fund needs (like JV, Lean, MVP, etc.)
Funding Source #1 Self The founder invests time and assets from savings and residual income. (No-Debt) Pros Cons 1. 2. 3. 1. 2. 3. 4. The base for other funding option Highest ownership to founder Maximum loss is limited to available time and funds not liabilities. Full control. The easiest to miss manage. In case of loss, 100% on founder. Usually limited and not enough.
Funding Source #2 Government Grants & Tax Credit • • • • Available programs in relation to industries, markets, topics, etc. Requirements (stage, invention, ownership, impact, etc.) Timeframe (dates and periods) Expected contribution (%, exclusions, limits, etc.) Pros Cons 1. 2. 3. 4. 1. 2. 3. 4. Free Assets Non-dilutive Exit info is not necessary Associated with other resources. Requires extensive preparations Might change business practice/model Takes long time Not always available
Funding Source #3 Donations • • • • • Assets given for social or sympathy reasons. Meant to be spent only on the advertised reason (although it can be spent otherwise) Main driver for donors is emotional engagement. Personal auditing might follow donations Best combined with crowd funding Pros Cons 1. 2. 3. 4. 5. 1. 2. 3. Free Assets Non-dilutive Financial information is not necessary. It can make great marketing impact. Can be combined with CSR. Over demanded (abused). Require social engagement Needs relatively strong/proper marketing
Funding Source #4 Incubator • • • • Intangible asset funding at free or discounted price. Consultancy, space, tools, data, market, support, etc. Professional incubators, CSR, or Marketing initiatives. Most incubation opportunities are found by the Entrepreneurs themselves. Pros Cons 1. 2. 3. 4. 1. 2. 3. Free or at very low price Great resource Can be strategic if with the right firm. Easy to obtain. 4. Hidden Supply The right incubator is hard to find Incubator’s commitment depends on the Entrepreneur’s involvement Industry and culture match requirements.
Funding Source #5 Accelerator • • • • Intangible + tangible asset funding at a discount or equity share (10-30%) price. Dedicated to goals achievement with strict commitments between all parties. Favored by governments (unlike incubators) Assigns dedicated resources to ventures with direct involvement. Pros Cons 1. 2. 3. 4. 1. 2. 3. Almost guaranteed to success Maximizes team production Connected to huge resources If Gov. funded, it is free (or minimum fee) 4. Demand >>> Supply Highly conditioned. Programs are specific to certain industries and markets. If privately funded, costs equity.
Funding Source #6 Co-Founder • • • • Joins the venture through co-finding idea, investing time, investing assets, or/& regulatory obligation adding significant value at the concept stage. Their share is dilutive. Co-founders share risks, profits, liabilities, authorities, and decisions. Ownership % is based on total investment (time & assets) not exit value. Pros Cons 1. 2. 3. 4. 5. 1. 2. Strong cofounder adds strategic values Risk is distributed Stronger commitment Increases individual dedication Doesn’t require salary expenses 3. 4. Conflicts If investment plan changes, ownership split becomes unfair. Increases decision making complication Reduces the main founder’s ownership
Funding Source #7 Competitions • • • Competitions are events aiming to market certain products/services by allowing entrepreneurs to pitch their venture and award the winners with some prizes. Focuses on networking and slight idea validation/critique. Prizes are normally limited to the winners but resources can be available during the competition. Pros Cons 1. 2. 3. 4. 1. 2. Free Assets (Non-dilutive owners equity) Networking can be the best outcome Exposure (in case needed) Proof of concept in case of winning. 3. 4. Idea secrecy exposure Winning criteria includes uncontrollable and subjective factors Judgment doesn’t reflect the best idea (rather best presentation and simple 1) Not widely available.
Funding Source #8 Pre-Sales • • • • The advance payment of a product/service before manufacturing/conducting it. Focuses on networking and slight idea validation/critique. Prizes are normally limited to the winners but resources can be available during the competition. Extended examples: Sponsorship, Pros Cons 1. 2. 1. 2. 3. 3. 4. Increases cash-flow The strongest source of equity for venture value and investor’s attraction. Increases ROE Maintains a higher share for the owner(s) Might decrease revenue (sale price). Delay in delivery. Applies debt/liability
Funding Source #9 Accounts Payable Debt (Non-interest credit payment) • • • • Depends on market trends and relationship between supplier & buyer. Credit facility is limited by time, amount, and/or cycle date. Overseas credit facility is usually governed by bank L/C (litter of credit). Examples: Salary (due date), electricity, telephone bill (limit & due date), 30,60,90,120,180 days payment terms, etc. Pros Cons 1. 2. 3. 1. 2. 3. 4. Non-interest debt funding Normally negotiable & extendable Exchangeable with other benefits or threats (sole-supplier or switching) Good for short periods (or back-to-back) 4. 5. May Increase prices Bank facility is not interest free! Well structured suppliers are hard to negotiate with. Its Cycle is short for business cycle Failure to pay on time might break relations
Funding Source #10 Dynamic Partnership • • • It is a partnership with KPI controls. Partnership can be a percentage, amount, shares, territory, rights, or others. Long partnership can be managed by interval, delivery, amounts, or fixed conditions. Pros Cons 1. 2. 3. 4. 1. 2. 3. 4. Just for all parties Incentivize partners Leads to accurate time commitments. Adds security to investors. Developing KPIs can be complex. Contracts require intensive details. Change control can be overwhelming Such contracts require extensive knowledge of deliverables and operations.
Funding Source #11 Private Offering • • • • Dividing the company into shares based on its expected exit value (ExitV=$1M/1M shares = $1FV/Share) even if actual present value of the venture = $0. Private offering is not welcomed and restricted in most countries (due to fraud). Shares are non-dilutive to their owners. Depends on the integrity and honesty of venture principals. Pros Cons 1. 2. 3. 1. 2. 3. 4. Non-interest debt funding Normally negotiable & extendable Exchangeable with other benefits or threats (sole-supplier or switching) Good for short periods (or back-to-back) 4. 5. Increases prices Bank facility is not interest free! Well structured suppliers are hard to negotiate with. Its Cycle is short for business cycle Failure to pay on time might break relations
Funding Source #12 Project Investor • • • • Dedicated to specific known projects with well defined timing, return, and risk. A form of temporary partnership (non-debt) with risk and liability sharing. Normally back-to-back payment with early exit for investor. Depends on relationships and negotiation. Pros Cons 1. 1. 2. 3. 2. 3. 4. Short term profit share instead of long term equity share. Doesn’t require collateral assets Risk sharing Relatively quick to obtain. Can be expensive Not regulated. Early investor’s exit.
Funding Source #13 Professional Investors (Angel Investor, VC, etc.) • • • • • Exit is #1 goal for investors. #2 is dividend, & venture team is #1 decision factor. Highly negotiable depending on the achievements of venture and need for fund. Expects 30-300% ROI/year depending on the risk and venture readiness. Business idea has no value. Instead, teams, IP, sales, competitive advantage. Investment is based on current exit valuation (regardless future expectations). Pros Cons 1. 1. 2. 3. 4. 5. 6. 2. 3. 4. Short term profit share instead of long term equity share. Doesn’t require collateral assets Risk sharing Relatively quick to obtain. Very Expensive if introduced early Limited to 30-40% of venture value. Tend to control main decisions. Culture fit is crucial. Investor exits first with better options. In case of problems, they exit with more damages.
Funding Source #14 Retained Earnings Funding Source #15 Public Offering Funding Source #16 Credit Card Funding Source #17 Convertible Debt (Mezzanine, Debt-to-equity) Funding Source #18 Notes Payable (Risk Interest Based)
Facebook.com/makethemaker @MTM_e Time to Disagree… QUESTIONS AND DEBATES Thank You Hicham Zinalabdin
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