Raising capital

While planning and iterating, entrepreneurs will need to raise capital in order to run those small experiments that will finally allow them to get to an MVP. Even though raising capital often looks like the most difficult challenge for creating a startup, it can easily be overcome if effectively thought through with the right strategy. A common factor holding entrepreneurs is the fear of haggling, which is a mistake. A very good exercise to deconstruct such fear is to actually haggle for something random like an item at the grocery shop. Some chances are that the candidate may make a fool of himself, or maybe actually start a constructive negotiation that could lead him to obtain what he was looking for, or close.

 

The idea of this exercise is to show that there is nothing wrong in asking for something. Worst case scenario, the candidate will not get what he wanted but he will at least have tried. In all cases, this won’t affect his life or the way relevant people will look at him, except the salesperson that may have scared in the process. Haggling should be widely use in the case of entrepreneurship. For most entrepreneurs starting a company, funding, knowledge and even network will be limited. By reaching out to people such as experts, potential partners or investors, entrepreneurs will not only save time but may also get the means to create and grow their company. As already mentioned many times, failure is learning and iteration leads to success… So haggle !

 

In the case of raising capital, common sources exist. They should each be used at different steps of a venture creation and entrepreneurs should know the benefits and disadvantages associated with each of them.

 

• Personal funding will be the first equity of any entrepreneur's startup. Publicized startups from Silicon Valley have often come from young undergraduates that did not need any personal funding, but in the real world, no one will invest in a startup if its founder(s) don’t have any stake in it.

 

• Friends and family are a common way to raise small amounts in the early stages of a startup. Even though they may be very happy to help a friend or a cousin accomplish such great achievement, it is sometimes difficult to mix personal and professional lives as entrepreneurs become accountable to their relatives on a financial level.

 

• Banks will usually provide amounts equivalent to the maximum that could be borrowed for a mortgage or a car. However, they will ask for guarantees and collaterals. Moreover, as entrepreneurship is a risky activity, they will most likely ask for high interest rates. Using credit cards or a house as a collateral are common ways to start funding a startup but can be risky in adverse situations.

 

• Business Angels are wealthy individuals or seasoned entrepreneurs willing to invest their money in companies in exchanges for shares of the business. They are usually willing to invest up to hundreds of thousands which can be highly beneficial for small startups seeking additional funding to grow. However, this could lead the founders to lose ownership and control of their own company.

 

• Venture Capitalists are professional firms that lend much larger amounts (several millions). When entrepreneurs reach such levels of funding, the initial value of their shares has grown exponentially. A relevant question to ask is whether the founder should try to cash out or sell the business while it is still on the raise.

 

Overall, no matter how much investors will be willing to invest in the startup, entrepreneurs should always know how much they need to move forward. However, their battle plan should not change if getting more money than expected. A common mistake made by entrepreneurs when raising much more money than anticipated is to stop validating, and to jump directly to customer building and company building. After all, if investors were convinced, there is no reason why potential customers would not be convinced (see Home Page and Developing an Entrepreneurial Mindset sections).

 

Even though we did not get into large details regarding ways to raise capital, entrepreneurs should keep in mind the legal implications that arise when getting funding. Even though search engines may be good enough to look at all the contingencies for friends and relatives loans, entrepreneurs should try and get council from professional lawyers when negotiating larger amounts.

 

Moreover, startup valuations are just guesses. As seen in the ideation section, it is very hard to anticipate how valuable a good idea will be. Entrepreneurs should bear in mind that what they are asking for is an educated guess since there could be hundreds of relevant alternatives to their solution, and that investors will also make their valuation of the startup based on educated guesses.

 

Last but not least, entrepreneurs should be wary to give up too much of your equity too early. Even though it is harder to survive with low capital to grow a company, the value created will at least entirely go to the founders. More so, if the business was to become successful, all the cash generated would also go directly to the founders. Entrepreneurs tend to ask, and sometimes get, too much at the expense of their ownership of the company.