What is start up finance? What are the ways of financing for start-ups?

 

What is start-up finance?

What are the ways of financing for start-ups?

What is a pitch presentation?

How to make a pitch presentation?

What are the modes for financing startups?

1. Overview-What is start-up finance?

Assume a scenario that you are going to start a business. You go to a bank and ask for money. What would be the reply of the bank? Do you think the bank will lend you the money? The obvious reply is no. And the reason is that you have not reached the level where a traditional lender or investor would be interested in you or would trust you. So the big question is how to bring finance for startups. The possible alternatives could be selling some assets, borrowing against one's home, asking loved ones e.g. family and friends for loans.

Now you can define the term start-up finance as injecting money for turning ideas into reality before approaching commercial lending is called start-up finance.

How to keep loans from family and friends business-like?

This is the hardest part and this is what distinguishes the entrepreneur from salaried people. A good way to get success in the field is to start a business, speed up operations and get to the point where the commercial lenders can trust you.

The other way is bootstrapping. Bootstrapping means building a company from personal finances or from the operating revenue of the new company.

Both require strong business plans and advice from experienced entrepreneurs and experts. These are the people who might be interested in your venture in the future.

2. What are the innovative ways of financing for start-ups?

Every start-up needs funding. The funding is required for acquiring plant and machinery, production of goods and services, remunerating human resources, paying federal taxes, etc. Banks or traditional lenders do not generally trust start-ups, so start-ups must find some alternative ways to fund their ventures.

Some of the most innovative ways to fund the start-ups are given below:

a)    Personal financing: It is the most important albeit it may not be one of the innovative ways. Most of the investors will step back if they do not see you putting your personal money into the venture.

Putting your personal money proves to the investors and entrepreneurs that you have a long-term commitment to your project and that you are ready to take risk

b)    Personal credit lines: In order to qualify for personal credit lines, your business should have enough cash flow to repay the line of credit. It is because the banks are very conservative in providing personal lines of credit. Under this category, credit cards are suitable examples.

c)     Family and friends: These are the people who generally trust your venture. However, the loans from family and friends need to be business-like. For this, the loans and other obligations from friends and family need to be in writing. Promissory notes or other forms of documentation would be suitable in this regard.

Investors and bankers consider this money as "patient capital". This money will be repaid later when your business and profit have grown. However, common problems with this type of financing are that

-Friends and family may ask for a share in the ownership

-It may ruin your relationship when your business does not go well

d)   Crowdfunding: It is the method of raising a small amount of money from a large number of individuals to fund a specific venture. It is the easiest way to raise capital. The money is raised through a vast network of people on social media or crowdfunding websites.

e)     Microloans: Microloans are small amounts of loans given by an individual or groups of individuals at a lower interest rate. Where there are groups of individuals, each contributes a small sum of money to the venture.

f)      Vendor financing: Here the company lends money to its customers to buy products from the lending company itself. Another way of vendor financing is deferring the payment until the goods are sold. If the usual credit terms are 30 days, then extending the period to 45 or 60 days depends upon the creditworthiness of the customer.

g)    Purchase order financing: The purchase order financing companies advance funds to the start-ups (supplier) to meet the purchase order. Here the company places the purchase order and in turn, provides the fund to meet the order. This method of financing is beneficial to the start-up as there are no large purchase orders to the start-ups in the initial phase. Even though they have purchase orders they lack funds to fulfill those orders. So this method addressed both problems of the start-ups at the same time.

h)    Factoring accounts receivable: When goods are sold on credit and the credit period is for 60 days, a factor pays the money upfront after deducting reserve at a specified rate. By doing so, the start-ups have access to money to meet the day-to-day obligations until the whole amount is received.

i)      Peer-to-peer lending: Many small and ethnic business groups having similar faith or interests support each other in their start-up endeavors. Here, a group of people come together and lend money to each other.

j)       Venture capital financing: Some investors prefer to invest in startups and small businesses with exceptionally high growth potential. Venture Capitalists take money from a pool of investors and place them in a strategically managed fund.

Venture capitalists invest with the expectation of taking an equity position in your company to help to carry out promising but higher-risk projects. In addition, venture capitalist expects a healthy return on their investment, particularly when the company starts going for public offerings.

k)   Angel Investors: Angel investors are also called informal investors, angel funders, private investors, seed investors, or business angels. These are affluent individuals or retired company executives who invest directly in small firms owned by others in exchange for ownership equity or convertible debt.

Some angel investors invest through crowdfunding platforms online or build angel investor networks to pool capital. The perceived benefit of obtaining funds from an angel investor is that they will not only contribute their experience and network of contacts but also their technical and/or management knowledge in your startup.

l)      Government grants and subsidies: Government agencies may provide financings such as grants, subsidies, seed capital, contributions, or financial assistance that may be available to your startup. This may require a lot of paperwork and implementation difficulties may arise when you belong to developing countries.

m)  Business incubators: Business incubators generally focus on high-tech sectors by providing support for new businesses in various stages of development. They also focus on areas such as job creation, revitalization, hosting, and sharing services.

In addition to sharing their premises and infrastructures, business incubators also share their administrative, technical, and logistical resources with your startup company.

Generally, the incubation phase lasts for two years. Once your product is ready you have to leave the incubator's premises and have to carry on your production in your own capacity. Incubators are suitable for business sectors like biotech, information technology, multimedia, and industrial technology.

3. What is a pitch presentation?

It is a short and brief presentation using PowerPoint given to investors that explains the prospects of the company and why they should invest in your start-up business. It has the following characteristics:

a)    It should not last for more than 20 minutes

b)    It should provide a quick overview of the business plans

c)     It should be able to convince the investors to put some money

d)   It can be made either during face to face meetings or online meetings

4. How to make a pitch presentation?

A powerful pitch presentation should have the following sections

a)    Introduction: A pitch presentation should include a brief introduction about yourself and your startup business. The following matters may be useful in this regard

-Who are you?

-What are you doing?

-What are the interesting facts about your business?

-What are the huge milestones that may have been achieved?

This opportunity should be used to get the attraction of investors.

b)   Team: The investors are not investing only in the idea but also in the team that will turn the idea into reality. Hence the next is to introduce people behind the scene including:

-Background of the promoter and how it relates to the new company

-Background of the team, their experience, achievements made in the past

-Significant results achieved by the team

c)     Problem: It is very significant that the new product or service that your company is going to produce will solve the problems that existing products or services encounter. Your presentation should include a brief overview of the problem.

d)   Solution: The pitch presentation should include the way your company is going to solve the problem. The investor should be convinced with the solution you are presenting.

e)    Marketing & Sales: This is the most important part that will influence and convince the investors for funding your new venture. So this part should be prepared with great caution including:

-The market size of the product

-Profiles of target customers

-How promoter is planning to attract the customers

-Forecasted future revenue and expected growth rates

f)      Projections/milestones: The financial projections should be made that depicts the viability of your venture and these shall include:

-Balance sheet: The projected balance sheet should be prepared on an annual basis that depicts the asset, liability, and equity of your company. 

-Income statement: The projected financial statements shall include the expected sales revenue generated, cost of sales, and other direct and indirect expenses.

-Cash flow statement: The projected cash flow statement shall depict how much cash will be generated from the business and how much cash will be utilized to meet the short-term and long-term commitments of your company.

g)    Competition: Even if you are going to produce a new product or service, your business will not be spared from the competition. In your presentation, you should include how your product is different from your competitors including the following details:

-Name of the competitors

-Price offered by the competitors

-Competitors strengths and weaknesses

h)   Business model: The business model denotes the core aspect of the business including purpose, business process, target customers, offerings, strategies, target customers, infrastructure, organizational structure, sourcing, trading practices, operational policies and processes, and culture.

Business is the way by which a company generates revenue and makes a profit from the company's operations which is called gross profit. Gross profit is the term used to compare the efficiency and effectiveness of your venture. When we subtract the cost of goods sold from revenue, the figure for gross profit is obtained.

For every investor money is dearer so it is better to include the following in the pitch presentation

-How you are planning to generate revenue?

-List of various revenue streams for a business model and their timeline

-How to price the product?

-What is the competitors' price for the same or similar product?

-Lifetime value of the customer

-Strategy to retain customers

i)      Financing: If your startup has raised any money, you should not forget to mention the fact. You should mention the sum raised, who invested, and how the money was utilized or will be utilized. If no money has been raised, an explanation regarding how much work has been accomplished with the minimum funding that the company managed to raise.

The investors want to assess the following about your business

-Who has invested their own money?

-How much money is required by your startup in total?

-How your startup will utilize the money?