Tag Archives: venture capital

Raising Money: So you are thinking of raising money for your business from Venture Capital firms?

To Get Venture Capital Funding, You Must Begin Thinking Like a Venture Capitalist When Raising Money!

When raising money, think like a venture capital. For many entrepreneurs, success begins with a great idea. However, how do you get this idea off the ground?  Raising money is needed for your company, but how do you attract investors?

Venture-CapitalMany young, emerging growth companies, understand that venture capital serves as an alternative.  Often, venture capital provides cash funding in raising money, which is exchanged for shares in the business and an active role in the enterprise’s future.

In January the National Venture Capital Association, one of the trade associations representing the U.S. venture capital industry announced the results of its industry paper, MoneyTree Report, on venture funding for fiscal year 2012.  The Association with PriceWaterhouseCoopers reported that venture capitalists invested about $26.5 billion in 3,698 deals last year. The report showed declines in both dollar and deal transactions down about 10% and 6%, respectively, from 2011. Fiscal year 2012 was the first drop off in venture capital activities in three years.

Economic uncertainty hindered the growth in new investments. As a result, many venture capital funds shrunk during the year. Venture capital firms have increased fund reserves  to support funding of current  investments and have become more discriminating in assessing new deals.

Understand that before a venture capitalist takes on higher risk the firm will determine the upside pay off. What this means is that the entrepreneur must do his or her homework to meet the expectations of the venture capital firm in raising money.  This is a two-way street.

Venture capital funding comes with a price. Some of the considerations the venture capital firm will review in raising money when assessing a potential investment include:

  • Enterprise leadership.  Evaluating the background, knowledge, and business acumen of the leadership teams is most important. Can the company’s leadership manage the business through the obstacles of a new business?  For the management team, each member should be prepared to explain how he or she would overcome any difficulties and how to get done more with less. For the entrepreneur, be warned that the venture capitalist is going to look into their eyes and ask, “Does this person know how to make money?”
  • Product and Service Offering.  Surprisingly, many venture capital firms say they cannot find good deals.  These firms are in large part, looking for emerging growth companies that offer products and services that can potentially provide a competitive advantage in the market place.  Venture capital firms want to know a lot about the specific industry sector and how the business will effectively compete with the competition.  The leadership must provide a strategic plan that synthesizes the marketing, sales, and distribution tactics that will be employed to attract and retain the targeted customer base.
  • Potential Return on Investment. Know that the venture capital firms are willing to take on high risk, it the potential returns are high too.  If the venture capital believes that the financial up side will be worth the risk, the firm will make the investment. To make this happen, the leadership will want detailed financial projections that are in line with the strategic plan in raising money.

Venture capitalist want to mitigate or manage their risk. Entrepreneurs, on the other hand, can assemble a strong management team, provide a well-written business plan, and show a leadership team that can execute the plan in raising money.

For a free online video course on how to raise money go to: http://garyrushin.com/raising-money-mini-course/

 

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Crowd Funding: the Next Turnkey Financing Source for Entrepreneurs and Small Businesses

Crowd Funding: Turnkey Financing Source for Entrepreneurs and Small Businesses

If ideas for a big creative project swirl in your head, but you need money to make it happen! Look at crowd source funding. Crowd funding may be the answer. People want to support creative activities for example looking for filmmakers needing money for documentaries, independent musicians needing money for musical projects, or just plain ideas that need money to make the world a better place. Alternately known as crowdfunding, crowd financing, equity crowdfunding, or hyper funding, crowd funding enables access to turnkey financing that supports projects with little regulatory friction. This is because, equity participation are not given to providers of the funding. In short, crowdsource funding aligns visionaries needing money with participants wanting to fund the vision. The U.S. is not alone; crowd-funding opportunities has gone global to include opportunities for Eurozone and Canadian businesses and entrepreneurs as well.Crowd-Funding-Vision

But now wait! The Jobs Act of 2012 is a game changer. Small businesses and entrepreneurs will have increased access to crowd funding sources. The U.S. federal government will allow participants in crowd funding projects to received ownership stakes. The U.S. Securities and Exchange Commission is writing the prudential regulations (the rules) for equity participations in crowd financing activities. With the recent departure of SEC Chairwomen Mary Shapiro, the regulations have been delayed (Mandelbaum, 2012). The SEC is tasked to protect investors. Investing in small business, especially start-ups, are notoriously risking and fraudulent activity can take place.

What is Crowd Funding?

A collective effort by consumers that network and pool their moneys, usually through the Internet, crowd funding enables the investment in and support of efforts initiated by other people or organizations (Ordanini, Miceli, Pizzetti, & Parasuraman, 2011). Kickstarter and Indiegogo are leading intermediaries organized to support crowd funding. Kickstarter alone helped facilitate over U.S. $350 million in project financing pledges.

Founded in 2009 by Jeff Chen and Yencey Strickler, Kickstarter is a New York based Internet funding platform for creative projects surrounding the arts to include films, games, and music to art, design, and technology. Backed by Union Square Venture and other venture capital firms, Kickstarter’s revenue model includes receiving five percent of the funds successfully raised through its platform (Milian, 2012). Indiegogo, a San Francisco based crowd-funding site is another player in the crowd finance space. Pledges to projects can be funded in U.S. dollars, British pounds, euros, and Canadian dollars.

So how does this work?

Financial backers, which are armchair philanthropists of projects, put their trust in the project creators by providing cash in return for a promise of a future return. The return can be naming credits as with a film, a discount price of the develop item, or some insignificant benefit. With the Jobs Act, crowd funding in the U.S. is about to evolve. Providers of project funding will be able to receive equity participations. Entrepreneurs will have greater access to capital as new providers of crowd sourcing and investors see opportunities.

Examples of projects that successfully received funding in 2012 (Santos, 2012) include SmartThings, which raised over $1.2 million with the help of 5,694 backers. With an initial goal of raising $250,000, SmartThings designed a device to let users digitally monitor and control parts of their homes. As a digital hub, allows the use of apps to switch on and off appliances with a bevy of sensors and products. OUYA raised over $8.6 million from more than 63,000 supporters. The goal of the company was to initially raise only $1 million. The company’s project was a $99 Android-base gaming console that offers its own controller and promises to make game development affordable.

References:

Lazar, S. (2012, December 27). Meet The 25-year Old Who Raised Over 8 million on Kickstarter . Retrieved May 7, 2012, from Huffington Post: http://www.huffingtonpost.com/shira-lazar/pebble-founder-eric-migicovsky_b_1497515.html

Mandelbaum, R. (2012, December 26). Crowdfunding’ Rules Are Unlikely to Meet Deadline. Retrieved January 3, 2013, from New York Times: www.nytimes.com/2012/12/27/business/smallbusiness/why-the-sec-is-likely-to-miss-its-deadline-to-write-crowdfunding-rules.html?pagewanted=all&_r=0

Milian, M. (2012, August 21). After Raising Money, Many Kickstarter Projects Fail to Deliver. Retrieved December 27, 2012, from Bloomberg: http://www.businessweek.com/news/2012-08-21/kickstarter-s-funded-projects-see-some-stumbles

Mulian, M. (2012, December 5). Crowd-Funding Site Indiegogo Is Going International. Retrieved December 27, 2012, from Bloomberg: http://go.bloomberg.com/tech-deals/2012-12-05-crowd-funding-site-indiegogo-going-international/

Ordanini, A., Miceli, L., Pizzetti, & Parasuraman, A. (2011). Crowd-funding: transforming customers into investors through innovative service platforms. Journal of Service Management , 22 (4), 443-470.

Santos, A. (2012, December 27). Insert Coin: 2012’s top 10 crowd-funded projects . Retrieved January 3, 2012, from Engadget: http://www.engadget.com/2012/12/27/insert-coin-2012-top-10-crowdfunding-projects/

TechCrunch. (2011, February 14). Startup Sherpa (Kickstarter): How To Get Successful Projects. Retrieved from YouTube: http://www.youtube.com/watch?v=kqDNWcu6Hs0

 

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