Welcome to our conversation about financing pathways.
So there are many potential ways of financing your business and
it can be very complicated because they're all related to each other.
So there's actually a number of lectures in this series that talk about
specific methods of financing, but I wanted to give you a general approach
about the overall methods and approaches to financing.
So this is a map of the many kinds of fundraising that
are available to new organizations.
On the upper left in tan are the related dilutive funding mechanisms.
So what does dilutive funding mean?
Dilutive funding means that in order to get money from these organizations you'll
have to give them a stake in your company, they'll have to get a piece of equity.
And these pieces are related.
Usually it starts with angel investors and potentially super angels,
which we'll discuss.
That usually results in venture capital and
eventually larger scale fundraising that comes out of that, or
else through accelerators which is another topic that we cover in a separate lecture.
So those are the dilutive funding mechanisms, and again,
it usually starts with angel investment.
In the lower right, you can see funding that's sometimes dilutive and
sometimes isn't.
Friends and family funding, crowd funding which has a separate lecture on it as
well, and the new area that we're not going to discuss in detail because it's
still being work out regulatory, initial coin offerings.
And then in the center, you have self funding, which is basically funding out of
your own savings, and then debt funding which is non-dilutive.
So, these are the sources of funding.
You might be curious about what sources of funding are most common for
among high growth companies.
In the US according to the Kaufman survey, the most common form of fundraising is
self funding and then followed by debt funding, then diluted funding, and
then finally the funding through friends and family.
And on the diluted funding side it's a very small piece.
Only a few percent of people actually receive diluted funding.
But those that do receive a lot of money.
So if you need to raise a lot of capital, that's the way to make it work.
So let's talk through some of these funding pathways in detail.
So when you consider funding,
there's a few ways to make comparison on funding methods.
The first of those is who provides the funding?
So is it a venture capitalist?
Is it an individual?
How is the funding being provided?
And who's the source of it?
Second question you want to think about is your stage of interest.
So in entrepreneurship, fundraising is often dubbed as being in stages, so
often there is a pre-seed stage, or friends and family stage.
That round of fundraising, pre-seed or friends and family round, is usually used
to build your minimal viable product, so it is in very early testing of your idea.
Then once you've been able to do that, then you'll go and
raise some seed funding.
Seed funding is to show traction.
To show that you actually some interest in your idea or
build a prototype if your idea is more complicated.
And then finally, you'll go onto an A Round of funding.
The A Round of funding is a more serious round investment where you are going to
start to scale or build out your business or your build out your final product.
There might be a B Round, a C Cound, a D Dound, each one gets
larger than the round before, so the amount of investment also varies by round.
Generally a pre-seed round you're receiving about under $500,000,
but that change.
A seed round is traditionally under $1.5 million.
And an A Round is usually under $3 to $5 million of investment.
In each round, you can expect to give them a third of the equity in your company if
it's diluted funding.
Somewhere between 20% and 40%.
So these are serious investments and take a lot of time to get.
What you might want to consider when you're thinking about fundraising what
the value add of your investors are.
Do they bring anything special to the table?
Do they have connections or other things can be useful as resources?
How much money can they deploy?
What is their fund size?
And how are they ultimately getting money?
Why are they bothering to invest in you at all?
So let's start by considering these issues from the side of the non-diluted funding,
which are the most common forms of fundraising, self-funding, friends and
family, and debt financing.
So these are usually all pre-seed funding,
because by the time you're starting to received seed money, a million dollars or
more, you're going to have to start receiving diluted funding.
They're different in type.
So self funding you want to think about when you're doing this.
Entrepreneurs often work for a principle of affordable loss.
So how much money can you afford to put into your business idea before you
walk away?
And so when you think about self funding, you might want to set up some sort of
realistic budget or idea about how much money you're willing to put in.
And what sign you need to have that you're willing to continue investing in
your business.
And you can use the techniques we've talked about in hypothesis testing and
lean startups to make sure you're doing that in a useful and targeted way.
For loans you want to consider about who will give these kind of loans.
So you can think about the kinds of loans that can come in from government agencies,
the SBA secured loans.
There's a whole bunch of ways of receiving loan financing for your business.
And government funding through things like SPARs and
again we have a lecture discussing loans in more detail.
So friends and family funding is complicated.
It's complicated in a number of ways.
One way it's complicated is that there's an emotional component.
You're asking people who care about you to give you money in return for
some sort of return and that emotional element shouldn't be overlooked.
The second reason it's complicated is these people often what may want diluted
funding, so
they may want to make an investment in you rather just giving you money.
And if they want make investment rather than taking a loan or some other approach,
you want to consider using a technique called convertible notes, and
convertible notes are not very common.
What a convertible note is and that's covered in more detail in other lectures,
is a way of deferring a decision about the valuation of your company until you
receive a major round of financing.
So convertible note is basically a form of debt that buys stock once you've received
a more official round of financing like a seed round or a series A Round.
So the convertible note will then convert into stock at some discounted rate when
that occurs.
So it's a way deferring decision about how much financing to take and
how much your company is worth until later on in the process.
Another approach to funding is to think about the diluted funding kind of
approaches.
And there's a variety of approaches to dilute a funding and
I want to go through those options for you here.
And again,
there's lectures with more detail on these approaches elsewhere in the course.
So one thing to realize is that the stage of investment does change what kind of
diluted funding that you can receive.
So here you have comparative numbers of 2010 and 2015.
The 2018 numbers are not out yet, but the trends continue to go higher.
And so you can look at these fundraising numbers and
you could see angel investment and VC make up by far the bulk of source of investment
available to start-ups in terms of billions of dollars.
And VC is a much larger component than angel investing,
unless you look at seed stage funding.
VC's almost do no seed stage funding.
Almost of of that is through angel investment.
So, angel investors are where you're going to seek out
your seed stage funding also through crowd funding and other approaches.
So, this giant chart will help you walk you through the mechanisms we talked
about and compare VC, Angel, Super Angel, Accelerators and crowd funding.
All different funding mechanisms again are covered in more detail in other lectures.
So, venture capital funding is usually happens in stage A or later and
usually requires a lot of investments.
So VCs are usually unwilling to deploy much less than a couple million dollars.
There's some exceptions to the rule.
Generally VCs are about putting a lot of money into a company.
They offer a lot of potential value adding.
So they have networks and connections they can give you.
They offer governance, which can be good or
bad as you'll see in the VC lectures and offer guidance.
Usually they have funds of $100 million or more they're willing to deploy.
Some of them go up to billions of dollars.
And they make money through fees so
they charge a 2% fee a year often in order to maintain their fund and
carry which means that they get a percentage of any profit that they make.
And they are aiming for very large exits.
On the other hand, Angel investors are usually interested in the seed stage,
sometimes even a pre-seed stage.
And they can deploy as little as $25,000 or as much as millions of dollars.
And sometimes they add value.
So you might have an angel investor who knows an industry really well,
that can be very helpful.
They don't usually have a fund, they're making personal investments.
And they're looking for equity, simple equity leading to exit.
So angel investors can be anyone.
That can be a group of wealthy doctors who are investing in your company.
It can be somebody who's made money before as an entrepreneur,
who wants to make investments, somebody looking to diversify their portfolio or
even just having fun investing.
So there's many kind of angels out there.
There's many kinds of angel networks and there's a discussion on angel investing
that you can go into more detail in the future lecture.
There's also category of angels doing super angels, so
as the cost of start up has dropped over time, it has become more and
more difficult for a venture capitalist to make early stage investments of companies.
So, super angels have stepped up and
somewhere between an angel investor and a VC.
They're highly connected in Silicon Valley and
other regional figures who make lots of investment.
Sometimes they actually don't run small funds, but
they make lots of seed stage in angel investment.
And because their investments are of high quality because they're well respected,
venture capitalists usually follow on to these angel and
super angel investments fairly quickly.
So they may run small funds.
They're often highly connected and offer networks and governance guidance and
they are again looking to make equity investment in your company.
As you have heard in the more detailed conversation on accelerators,
accelerators are pre-seed investments that happened very early on a stage your
company or join accelerators.
They're usually going to invest somewhere between $20,000 to $100,000 in
your company, provide mentoring, networks, classes, and ultimately, take about
5% to 10% of your equity in your company in order to make that investment.
Crowd funding as you'll see in more detail in the crowd funding discussion,
it can be diluted or non diluted.
It's usually precede money, somewhere between a $100 and a $1 million.
The value add comes from the community.
It's making investment in you.
And they don't usually make money, although, equity crowd funding does.
So there are many ways to get potential funding in your company.
Each approach has its pros and cons and not always substitute.
So it's not like VC is the same thing as angel investment,
is the same as the super angels, is the same thing as accelerator.
There's reasons you might want to pick one of these versus another and
you need to think about own motivations.
You need to think how these different forms of fundraising complement or
don't complement each other.
And you have to realize that the early choices you make about how to raise
funding impact your later choices.
So there's a lot of complication here.
And I'd highly recommend looking at some of the lectures on fundraising
techniques and funding to get more detail.
