How to fund a start-up?

Wed , Ngày 26/06/2013

Let's find out 5 phases of funding a startup!

The key to wooing venture capitalists (other than having a great idea in a promising industry) is to ask for money at the right time in a VCs lifecycle. Here are the funding phases for a start-up and how they correlate with a VC’s lifecycle:

Phase 1: Seed Funding Seed funding usually comes from you - the entrepreneur’s bank account, angel investors – potentially mom and dad – or crowd funding. Seed money allows you to solidify a talented team and a business plan which is required when it comes time to talk to VCs. Right now, a company called Neptune is raising seed money through Kick Starter with plans to beat Apple to making a smartphone the size of a watch.

Phase 2: Round 1 of Funding VCs start when a group of people agree to put money in a pot and not see returns for 10 years. If the VC is worth $100 million, then in Round 1 they will invest about 1/3 of the fund in a variety of companies. As an entrepreneur, this is when you want your business idea to be noticed and funded. Square Trade Inc., a start-up offering warranties for your tech gadgets, recently disclosed receiving $238 million in round 1 from 11 different funds.

Phase 3: Round 2 of Funding Provided your business is doing well, you may receive a second round of funding after 3 years. At this point in the VCs life cycle, the firm will look at all their investments, weed out the ones that went belly up, and invest more in the companies doing well. Photobucket recently went in for an additional (and they claim last) round of funding from VCs for somewhere between $5 and $10 million.

Phase 4: Expansion Now, your start-up is 3-5 years olds and hopefully close to turning a profit on its own. At this time, funding will come from subordinated debt or preferred equity. This is the expansion phase. Twitter appears to be in Phase 4. After receiving $15 million in 2008, it’s waiting to IPO until it can earn steady profits for an entire year. This “growth” money doesn’t come from VCs, but helps start-ups push past the funded phase into the next level which is…

Phase 5: IPO or Sale By now, your start-up is 5-10 years old; you’ve either made it or folded. Now the venture capitalists are ready for their payday when you sell or go public. Most VC firms enjoy a 700% return on their investment in companies which go public – however many of their investments won’t make it to phase 5.

Thank onlineMBA for sharing!