Financing a startup



Here’s the outline of a presentation/discussion I had with my mentor group of MIT’s Post-Doctoral Association. We spent the entire 90 minute meeting talking about how to finance a startup and could have easily spent another 90 minutes. A lot of interest from the mentee, many, many questions posed.

Financing a Startup

  • Type of venture determines
    how to finance it

    • Sole proprietorship – S-Corp
    • Slow growth business – S-Corp or LLC
    • High growth business – C-Corp
  • Friends & Family money
    • Angels & VCs may expect you to have friends & family invest
    • Shouldn’t invest more than they can afford to lose
    • Some investors expect founders to invest – see point 2 above!
    • Keep in mind all the sweat equity you are investing
  • Angels
    • Wealthy individuals who are accredited investors
    • Rule of thumb: must have net worth of $1 million +
    • Tend to invest with heart as well as mind
    • Angels can help, but also hinder
    • Super Angels
    • Extremely wealthy individuals who can write a six-figure check
    • Relatively few on East Coast due to lack of IPOs
    • May have incredible expertise & contacts
    • A long shot for most founders
  • Angel Groups
    • Filling need for startup funding not being met by VCs
    • Either group invests or individuals make their own investments
    • Older angel groups getting more like VCs (not good!)
    • Contact the managing director
    • Convertible Debt
    • Obviates need to value the company
    • Preserves equity
    • Investors get to convert their loan into equity at a discount
    • Very popular with early stage companies
    • SAFE
    • Simple Agreement for Future Equity
    • Variation on convertible debt but has no interest rate or maturity date
    • Simpler than convertible debt
    • See my post What’s the difference between SAFE and a convertible note?
  • Venture Capitalists
    • Most expensive money there is!
    • Warm introduction mandatory
    • Rocket fuel designed for scaling, not building
    • Investment based on team, market & product
    • CEO most important member of team
  • Strategic Investors
    • Motivated by strategic advantage as well as financial gain
    • Rarely if ever lead rounds – you need to find a lead
    • May cap your upside
    • What is their added value?
    • Usually only invest in first round
  • Royalty Investors
    • Don’t take equity
    • Invest a sum in exchange for % of your revenue over time
    • Must have steady revenue stream to qualify
    • Very rare & hard to find
  • Grants, Foundations & Contests
    • Equity-free capital!
    • SBIR grants for scientists
    • Long & calendar-centric funding cycle
    • Applications can be time consuming
    • Awards can generate good PR
  • Your Credit Cards
    • Lots of tales about founders doing this
    • High interest rates
    • Might be a last resort in lieu of bridge loan
  • Crowdfunding
    • Kickstarter & IndieGogo the leaders
    • Funding is not for equity
    • Funders get some advantage: earlier shipment, reduced price
    • Can succeed if you have a great incentive
  • Incubators
    • Small amount of capital – $100,000 for 6% equity
    • Access to current founders & alumni network
    • High quality mentoring
    • Access to venture capitalists & angels
    • The best are harder to get into than MIT!
  • Customer Revenue
    • NRE – Non-Recurring Engineering
    • The best way to finance – no dilution
    • Usually not the best way to scale
  • Going Public 
    • The grand slam home run of entrepreneurship!
    • Goal of VCs
    • Advice & guidance of experienced CFO required
    • Digital Tokens & Alternatives to IPO
    • Check out JOBS – Jumpstart Our Business Startups Act
    • SEC Regulation A+ – legitimizes digital tokens
    • Direct listing – doesn’t raise money like IPO
    • Tap capital markets with expense of an IPO
  • Perform investor due diligence
    • Study their previous investments (portfolio)
    • Contact their founders
    • How do they act when a venture stumbles?
    • How deep are their pockets?
    • Do they syndicate with other investors?
    • What’s their added value?
  • Resources

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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