Report on Features and problems of Startup Investment Management

A business startup requires a huge budget and a continuous source of financing until business reach at the breakeven point.

However, prior to this business start-up require funds for the purchase of assets including equipment, machinery, and recruitment of the workforce to execute business operations in the required manners.

Thus, conclusively it can be said that all fortune of business highly depends upon the sources of financing and investment.

There is a variety of investment opportunities to consider when trying to acquire funding for startup.

Depending on where the business is at in its development, some funding options may make more sense than others [8]. 

In many cases, companies should seek to mix-and-match investment opportunities throughout the various stages to ensure that you have multiple, diverse capital streams.

Here’s a deeper look at some typical private investment options based on company development stage:

1.    Idea Stage - in this stage, the entrepreneur is still developing and fine-tuning the concept of the startup and needs funds to complete essential tasks such as creating a detailed business plan.

Advantage is as follows:

·       Funds are typically raised through personal finances or close connections in this early phase.

Disadvantage are as follows:

·       Bad business plan can affect investment

2.    Bootstrapping - at the Idea Stage, it can be difficult for companies to attract outside financing, so in many cases, it falls to the founder to provide the initial startup capital.

Advantages are as follows:

·       There’s no one to convince but yourself

·       You own the entire enterprise

·       You maintain control of all aspects of the business

Disadvantages are as follows:

·       Growth will be slow

·       Loss of opportunities for new business

3.    Pre-Seed Stage - in this stage, the entrepreneur needs additional funds to sustain current growth and to perform tasks like market validation. An entrepreneur can continue to rely on funding options from the Idea Stage in addition to exploring some new external avenues as well.

Advantage is as follows:

·       Entrepreneurs are continuing to refine their approach to funding in this stage as new lessons and best practices are being discovered regularly.

Disadvantage is as follows:

·       Pre-Seed is still a relatively new phenomenon in capital fundraising that has come about as a response to investors dedicating less money to new ventures in the Seed Stage.

4.    Seed Stage - the Seed Stage marks the point in a company’s growth where all of the initial preparation comes to fruition and the business begins to acquire customers.

Advantage is as follows:

·       At this stage, a Series A funding round to raise anywhere between $1M – $30M will need to take place, which typically leads an entrepreneur away from individual investors and towards investment firms.

Disadvantage is as follows:

·       They’re challenges in this stage to carve out a market share and to find a way to ensure repeated success.

5.    Crowdfunding - is a method of raising capital through the collective effort of friends, family, customers, and individual investors. This approach taps into the collective efforts of a large pool of individuals — primarily online via social media and crowdfunding platforms — and leverages their networks for greater reach and exposure.

Advantages are as follows:

·       Can generally retain majority ownership and control;

·       Simpler due-diligence process;

·       No dominant investor to appease.

Disadvantages are as follows:

·       Still a VERY NEW as a way to fund a company;

·       Still some confusion about how it operates, how investors get insight into the performance of the company, how investors “cash out”, how management communicates with potentially hundreds of individual stakeholders.

6.    Incubators / Accelerators - startup accelerators offer not only startup capital — usually seed funding level, as in $50,000 to a couple hundred thousand dollars — but also offer support for startups that are getting themselves off the ground.

Advantage is as follows:

·       Each accelerator is different but they usually offer a combination of funding, mentorship, and other forms of guidance.

Disadvantage is as follows:

·       Being accepted into a startup incubator or accelerator is very difficult as there is a significant amount of competition. Additionally, receiving funds is not a guarantee.

7.    Venture Debt - this type of funding is only available to those entrepreneurs whose company is already venture-backed.

Advantages are as follows:

·       Venture debt is a great tool for short-term financing, especially for companies who need to make a one-time purchase and simply don’t have enough capital on-hand at the time, such as a retailer re-stocking for their peak season.

Disadvantages are as follows:

·       Venture debt funding is essentially a loan that you will have to repay, regardless of if the company is profitable, without having to give up any equity. Missing a single repayment could force the company into being sold or liquidated due to unfavorable default terms that are typical of this funding option.

8.    SBA Microloans and Microlenders - if you’re looking for a smaller investment, a microloan may be your best option. The Small Business Administration (SBA), a government entity, offers a program that connects startups to private lenders for loans of up to $50,000. Other microlending nonprofits are also available and can offer loans averaging $12,000 to $13,000.

Advantage is as follows:

·       Microloans are ideal for startups – that are just in the beginning stages of creation and in need of seed money.

Disadvantage is as follows:

·       If you’re wanting total control of your business, this is a bad idea as the loans comes from private lenders, who want to take control.

9.    Angel investors - are typically high net worth individuals who look to put relatively small amounts of money into startups, typically ranging from a few thousand dollars to as much as a million dollars.

These players invest in you with the expectation of a high return on investment (ROI) and may choose to play a larger role in your startup by requesting input on daily operations. Angel investors may also ask for a seat on your board of directors.

Angels are often one of the more accessible forms of early stage capital for an entrepreneur and as such are a critical part of the equity fundraising ecosystem.

The biggest benefit to working with an angel investor is that they can usually make an investment decision on their own. Not having to manage a partnership or corporate hierarchy of decision-making allows the angel investor to make bets that they feel comfortable with personally. Often this is what an entrepreneur needs early in their startup’s development.

Advantages are as follows:

·       Interested in helping grow the company

·       Take advantage of the Angel’s network of partners, customers, management, talent, etc.

·       Not as much “due-diligence” as a Venture Capitalist

·       Will usually not take majority ownership

Disadvantages are as follows:

·       Hard to find, not as much money available as a VC

·       Often not as sophisticated as they think they are

10.                        Revenue-Based Financing - this type of funding is a good option for companies in the Early Stage that have demonstrated the ability to drive consistent revenue with high gross margins.

Advantage is as follows:

·       With this model, a business receives upfront capital in exchange for giving up a fixed percentage of future revenue to the investor every month until the loan has been repaid in full.

Disadvantage is as follows:

·       There might be less capital in-hand each month as a result of this agreement.

11.                        Growth Stage - signifies that a company has achieved and surpassed several startup milestones. It means they are looking to scale at an even greater rate by adding infrastructure and expanding operations.

Advantage is as follows:

·       This round of funding is categorized as a Series C, which seeks $10M+ in the capital.

Disadvantage is as follows:

·       These options are who are more risk-averse in the early stages.

12.     Private Equity - part of the private sector, private equity firms invest in startups or businesses through shares or ownership in the company.

Advantage is as follows:

·       A private equity firm usually raises funds for investments through large third-party investors such as universities, charities, pension plans or insurance companies.

Disadvantages are as follows:

·       Startup private equity investors take a public company and make it private. This then results in 100 percent ownership of your business’ profits.

·       Essentially, a private equity firm has the capability to buy out your company.

13.     Friends and Family - many startup founders turn to their friends and family to help them with initial funding. After all, those are the people that already believe in what you’re doing — you don’t have to convince them the way you would a VC, angel investor, or bank.

Friends and family may not be checking regularly for a return on their investment, but they be will anxious to get their money back (and then some) as the company grows.

Advantages are as follows:

·       They trust you and won’t ask for too many details.

·       You can retain ownership and control.

·       They will stick with you when things go bad.

Disadvantages are as follows:

·       Growth will be slow, and you may miss opportunities for new business.

·       You risk destroying important personal relationships.

·       Potential personal complications.

14.                        Venture Capital - is financing that’s invested in startups and small businesses that are usually high risk, but also have the potential for exponential growth. The goal of a venture capital investment is a very high return for the venture capital firm, usually in the form of an acquisition of the startup or an IPO.

Venture capital is a great option for startups that are looking to scale big — and quickly. Because the investments are fairly large, your startup has to be prepared to take that money and grow.

Venture capital investments are more common for tech and biomedical companies.

Advantages are as follows:

·       Grow, grow, grow.

·       Take advantage of the VC’s network of partners, customers, management, talent, etc.

Disadvantages are as follows:

·       Hard to find, hard to convince.

·       High expectations, lots of “Due Diligence”.

·       Generally, have to give up majority ownership.

15.         Banks - small business loans or Traditional bank loans can be a valuable financing option if you are able to secure favorable terms. Banks typically provide business startup loans with the lowest interest rates and will not be given equity in the company.

Advantage is as follow:

·       Banks are everywhere.

Disadvantages are as follows:

·       They want you to pay it back ... with interest!

·       Usually not even an option for start-ups.

·       Can be inflexible and onerous when revenue projections are not met.

·       Can be a severe restriction of cash flow.

16.                        Grants - government grants for small businesses come in three forms: federal, state, and local.

·       Federal grants usually offer the most money – and have the most competition. They’re also pretty specific and usually tied to a government agency that has clear requirements for qualifying for the money – and for what they expect you to do with it.

·       State grants, on the other hand, are usually less money than federal grants but also – depending on your state – less competitive. State governments may work with the federal government to administer money that’s been set aside specifically for small business grants.

·       And on the local level, grants tend to be even smaller but they may be easier to get, because personal connections still mean something. Usually these grants are about improving your local community, so if your startup or small business is focused on bettering your town or county, definitely take a look at local grants.

Advantages are as follows:

·       Sizable sums of money to advance the research and support product development efforts

·       The government often buys the product when its ready

·       You can retain ownership and control

Disadvantages are as follows:

·       Usually takes a long time and lots of paperwork to get the money

·       The research (usually) has to be tied to a government program, which may not be of interest.

There’s no written rule that applies to every single startup, but investors have often said that a combination of the following is a good start:

·       Team: for any investor it takes a miracle to get investment dollars out of them if they’re not impressed with the team.

The people behind a startup are going to define its future and they will be the ones making the decisions that will push a company one way or the other.

·       Product: if the startup’s product is not supported by valuable metrics, investors will have to make a decision to invest or not based on their gut feeling or previous experience in the space.

There are a lot of examples of startups that have launched good products that have failed at getting users and traction. Sometimes the cause behind this is that the products themselves are not solving a significant problem -or are in search of a problem- or that it’s not the right time for that product (like Twitter in 2005).

·       Size of the market: One of the biggest variations from investor to investor is the size of their fund, and again, it’s important that you find investors with a fund size that matches the scale of your business and your goals.

What drives most investors is finding startups that at some point can become big, large companies to get a significant return on their investment. Excellent returns for investors are those that can pay back ten times the amount invested, and only high growth and scalable startups are able to reach those levels.

All else being equal, targeting a large market is the best way to inspire excitement in investors.

The stage (in other words, the valuation) - the valuation that an entrepreneur chooses for his or her startup affects how attractive it might seem to investors.

In theory entrepreneurs will look for high valuations in order to own as much as possible of their companies; investors, the exact opposite.

If a business angel or Venture Capital firm considers that the risk associated with a startup is too high, it will try to own as much as possible of that startup, thus pushing down its valuation.

Another risk associated with startups that raise high valuations is that they might have a hard time justifying future rounds of financing at even higher valuations.

·       A Competitive Edge - if an investor is familiar with your industry, they probably know of at least a few competitors for your business, and if they don’t already know, they can find out quickly. Before they invest in you, they will want evidence that you have some significant advantage that the competition cannot easily overcome.

The goal isn’t to prove that no one else will ever compete with you; again, the reality is that somebody probably will. The goal is to prove that when somebody does try to compete with you, they’ll lose.

As mentioned in the beginning, start-ups influence not only economy itself but have influence on more spheres. Different governmental or (in the case of the Ukraine) European Union initiatives or programs can enhance the firms’ activities, such as innovation centers or science parks.

As start-ups usually control certain knowledge to some degree and they want to grow in the future, there is high possibility that their knowledge will be diffused to other subjects.

In other words, it means that start-ups do not only create new jobs but move private sector ahead as they manifest creativity and innovativeness, and furthermore turn ideas into real life.

Before reaching out to potential investors, it’s a good idea to understand the guide through the process of creating a business.

In this case, venture capitalists, angel investors, or private equity firms are likely more compatible for startup funding. If primary focus is purely to seek funding, the more suitable option will be for microloans or crowdfunding.

Investors are in it to make money. Main task is to show them that they’re getting just that – better than their other investment opportunities.

For a detailed understanding, we should break down the important criteria startups have when fundraising [9].

The 4 criteria to consider (decision speed, outside help, bureaucracy, liquidation preferences) Angel Investor:

·       The fastest investor is almost always the angel. Angels can cut checks after just coffee – it’s their money. They can do what they want with it.

·       I ranked angel networks slightly ahead of syndicates as their members are typically more engaged. Members invest in fewer deals and are often locally present to work with and help founders. This creates strong regional support networks that can be vital to growth.

·       Solo investors definitely win this category. They have no accountability and can cut checks over coffee. Plus, there are no politics over who gets funding or carry.

·       Individual investors are often the least savvy and/or cutthroat when it comes to liquidation preferences and terms.

If this seems counterintuitive, it’s because it is. There’s no one best way to define an ideal investor. Each group brings something important to the table.

Angel investor generally have little-to-no upside but come with increased complexity for investing.