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Lesson 8 Raising Capital
Lesson 8 Raising Capital
Introduction
The end of the Internet bubble means that there is a dearth of good deals. In fact some
venture capital funds have been returning money to investors because of this. The combination of
plenty of money and lack of good buys has opened a market that has been available only to a
2. Discuss the different sources in raising capital: debt and venture capital, incubators,
accelerators, grants.
Start Ups
Start-ups almost always raise capital in stages. Hopefully for the technopreneur the value
of the business increase at each stage. But this may not always happen. Market conditions may be
difficult (like now) or there may be internal problems in the company. The reason for different
rounds of investment is that the significant risk involved in a start-up decreases as the business
manages to prove its technological concept, develops a product or service, markets the product
and generates income through selling it. As time passes, the business is able to project its cash
flows more accurately; investors will sink money into the ventures more confidently.
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Financing in rounds mean that investors usually put in only a small amount of money
initially, increasing the amount gradually. Usually the technopreneur is happy with this
arrangement even though there is the danger he may not find funding at a critical stage. This is
because the larger the initial amount the investors put in, the more equity he would have to give
away. He prefers only to raise what he needs because as the business becomes progressively less
The following illustrates the typical rounds that a business raises money
1. Start-up seed stage: The concept and management are in place. There are some
2. Development stage: The product or service has been developed and there is some product
$5 million.
3. Sale stage: Products and services confirmed with sales and customers. Revenue
Generating. Valuation is based on capital required and for what purpose. Can be pre-money
4. Expansion stage: Company has achieved great results in a small market. Expansion is
being made into new markets or products. Valuation is based on profitability. Higher
valuation is due to profits. Typically priced at around $25 million to $100 million.
5. Liquidity stage: Good company, great solutions, located in the right markets. Pre-IPO
stage or exit stage funding round. Valuation substantially higher and based on cash flow,
future potential and so on. Typically priced at twice the price of previous round.
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6. Cashing out stage: If the company is listed, it is valued based on market sentiment, peer
group comparison and company's potential. If it is acquired then the valuation is based on
start “a willing buyer-willing seller“ model. Typically a good exit should be priced at 50
to 75 times of the seed stage valuation. And after various levels of equity dilution, a
typically early stage investor looks to make a gain of 20 times the amount he put in.
Key Takeaways
Venture debt is a cumulative term used to describe loans specifically created to provide
support to startups backed by investors. Venture debt is generally used for startup
companies that deal with products and services in the field of technology, life science,
Venture capital is a type of financing where investors provide capital to companies (in
their early stages of development) that show great potential for growth in the long
term. Venture capital is generally provided by experienced investors who have been in
the business of backing up startups for a long time (generally >10 years).
While venture debt and venture capital serve the same goal of providing capital to
startups, they can differ in a few ways. The factors where they differ include equity,
When weighing the advantages and disadvantages, venture capital seems to be best suited
to a company that has been doing business for a few years and has created a solid
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structure (or org design). The startup must also be in an industry that is currently in high
demand. When these factors are present, the founder would typically already have the
Venture debt is best suited to companies that are in the early stages of establishing their
products and/or services. Under these circumstances, you are generally not making any
impressive leaps with your revenue and require quick money to cover expenditures such
Venture debt is a cumulative term used to describe loans specifically created to provide
support to startups backed by investors. Venture debt is generally used for startup companies that
deal with products and services in the field of technology, life science, and other inventive
economies. It’s targeted at small startups with venture capital backing rather than startups that have
Most of the credit that is available to startups is based on their ability to generate cash flow.
Another category of lenders is the one that provides advances against a startup’s liquid assets.
These lenders rely on collateral as a source of repaying the borrowed money instead of cash flow.
Both of these approaches are not recommended for startups that are in the early stages of
generating revenue. In the case of venture debt, repayment depends on the startup’s ability to raise
more capital which will fund growth and also repay the debt.
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What is Venture Capital?
Venture capital is a type of financing where investors provide capital to companies (in their
early stages of development) that show great potential for growth in the long term. Venture
capital is generally provided by experienced investors who have been in the business of backing
up startups for a long time (10+ years). While their investments generally take a monetary form,
they are also known to provide valuable technical and managerial advice to founders.
During a venture capital deal, ownership to chunks of the company is sold to the investors
with limited partnerships generally established by the venture capital firm. Venture capitalists take
a major risk by investing in new startups but the payoff if the company goes public / is acquired
more than makes up for the initial investment. They generally get paid by selling their stakes in
Venture capitalists work at venture capital firms (or “VC firms”) and are known to invest
in small businesses at later stages of their existence. However, in the early days of a startup, angel
investors play a very important role in providing funding. Angel investors could often include
High Net-Worth Individuals (HNWI). These are individuals who have retired from their days of
business and now look to provide early investment to entrepreneurs. Startups that have received
angel investments for some time have a better portfolio -- which benefits them when they apply
A technopreneur needs to study each VC firm's investments criteria and approach only
those firms that offer the best value in terms of growth and expertise that the start-up may need.
Some venture capitalist firms are also run by technopreneurs, who after one or two rounds of
success and capital, have headed out to help other technopreneurs build, craft their niches and
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create greater success stories, with their experience in a start-up environment. Their added input
With the market downturn since the dot.com crash, most VC firms are hibernating like
bears in winter. At the present time, there is very little VC activity at the seed stage. VCs should
ideally be approached once a company has completed product development, has a few customers
and revenue is coming in, that is, at the second or third round.
While venture debt and venture capital serve the same goal of providing capital to
The following are some of the factors in which venture debt differs from venture capital.
1. Equity
Investors provide founders with capital to build their startups in the initial stages. Venture
capitalists tend to ask for a good chunk of equity in the company in exchange for the capital. In
the case of venture debt, on the other hand, the issuers tend to avoid taking any stake in the
company.
2. Value
In the case of venture debt, the cost of debt remains constant and is limited to interest rates
which are agreed upon by both the company and the issuing party. Venture capitalists tend to rely
upon equity, the value of which tends to fluctuate over time and sometimes does so drastically
3. Repayment
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Venture debt is similar to a bank loan -- repayment includes the principal amount plus the
interest that the lender would have imposed on the borrower (i.e., the startup) in the beginning. In
the case of venture capital, borrowed money is not paid back like it is in traditional loans. Rather,
the investors buy a significant stake in the company which they can sell as the overall value of the
startup increases over time. The exit strategy for venture capitalists generally comes into play when
a company plans on going public, when there's a merger, or when it is acquired by a larger
organization.
While venture debt returns have less risk when compared to those of venture capitalists, the
average payout for venture debt is less than that for venture capital.
4. Valuation
Business valuation is a process where the total economic value of a business is calculated. This
is used to identify the fair value of a business. In the case of venture debt, a startup does not need
to be evaluated, a circumstance that reduces the complexity of due diligence. However, in the case
of venture capital, a startup will be thoroughly scrutinized with a rigorous due diligence process.
5. Ownership
In the case of venture debt, there is no requirement to provide a seat to the lenders on the
startup's board. The lender lets you retain 100% ownership of the company and does not weigh-in
on the way you run the business. By its very nature, venture capital generally requires a seat on
the board. This is primarily because venture capitalists, in addition to money, provide technical
and managerial advice to the startup. However, this tends to cost the founders a certain loss of
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While venture debt can be a great asset to a budding business, there are a few instances
where it is advantageous. This is especially true in cases when venture capital might not be right
for a startup.
The following are some of the scenarios when you can use venture debt:
a. Insurance. You can come across various obstacles while running a new business. Many times,
to overcome these hurdles, you will need some kind of monetary cushion. Venture debt can
come very handy in such situations to avoid any lasting damage to the business and help it
keep moving forward at a smooth pace. If the startup takes longer than anticipated to reach its
next developmental stage, then venture debt could come in handy as insurance.
b. Fund larger expenses. While running your startup, you may come across scenarios where you
need more money. These expenses will generally have something to do with the expansion,
scaling, or acquisition of valuable assets. If you require extra capital during these moments,
then opting for venture debt is a fairly safe option available to you. It the cheaper alternative
c. Covering under-performance. You cannot always expect your profit graph to be pointing
upward. There will come points, especially in the early days of running a business, when you
will be underperforming. During a downturn in the market, you may fear a decline in your next
tally of capital. Venture debt comes in handy in this situation as it will help finance your
business during this time so that you don’t take any significant losses until the market
stabilizes.
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d. Milestone boost. When running a business, you will likely set certain milestones which, when
achieved, will be an indicator of transitioning into the next phase of the venture. However,
while you may be making a steady profit, you may still fall short of hitting your next milestone.
In such situations, venture debt acts as a kind of a stimulus to provide the remaining capital.
e. Avoid Bridge Rounds. Bridge rounds are small fundraisers that raise enough capital for
startups to help them survive till the next major infusion of funding. They are generally
implemented throughout the life of a company. However, raising a bridge round from your
investor can be an expensive endeavor and potentially create a poor image. Venture debt can
help fill these portions so that you can make it to the next milestone without requiring a bridge
round.
Venture capital is a smart and established way for businesses to raise capital to get things
going. The following are some circumstances where venture capital can come in handy:
a. Early-stage. As mentioned above, venture capital is a great way for startups to obtain the
money to acquire the assets that are required in the early stages of establishing a business.
Early-stage financing can take multiple forms based on why you require the capital.
Seed financing is when startups request a minimum amount that will help the founder
Start-up financing, the next step in early-stage capital, is where financial support is
provided to a company in its early days to finish the development of products and/or services.
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The next form of early-stage financing is when financial support is provided to a startup
b. Scaling project. After a startup has been running for some time and has found a comfortable
pace at which it can develop and deliver its products and/or services, the next big step would
be to expand the business. An expansion could entail anything like moving from a small office
to a larger office, adding more to your infrastructure, growing the team significantly, or
Expansion financing can take various forms based on the amount being raised and its use.
One of these types is called second-stage financing which is provided to companies looking to
begin the process of expansion. The amount of capital needed in this type of financing is rather
large and used to cover all facets of initial expansion efforts. Another form of expansion
financing is bridge financing. This type of financial support comes with short-term interest and
is used as monetary assistance for companies that use an Initial Public Offering as their
c. Acquisition. After a certain point in running your business, opportunities to expand into newer
avenues will arise. One of the ways to go ahead with this expansion is by buying entire
companies or certain parts of them. The acquisition and merger of two companies, regardless
In such situations, venture capital funding can give you the right push to make acquisitions
go smoothly.
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Which is better: Venture Capital or Venture Debt?
To understand which one of these options is better for you, founders must understand the
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Advantages of Venture Capital
Since VC funding is not a loan, there is no need to pay the money back and it is free of any
form of interest. The risk completely lies with the venture capitalist.
Venture capitalists are a great font of experience and knowledge related to running a
successful business. Other than knowledge, they can also provide crucial guidance and
Venture capital is provided to businesses in return for equity in the company. This allows
venture capitalists to have their voices heard during important board decisions. There is
potential for some clash in beliefs between founders and VCs as the latter assert their
ownership. Since founders give up some percentage of the total stock, there is an added
Since most of your projects will be confidential before the official release, members will
be asked to sign an NDA (Non-Disclosure Agreement). However, some VCs tend to avoid
In weighing the advantages and disadvantages, venture capital seems to be best suited for
a company that has been doing business for a few years and has created a solid structure (or org
design). The startup must also be in an industry that is currently in great demand. When these
factors are present, the founder would typically already have the necessary knowledge to deal
Next, let’s look at some of the advantages and disadvantages of venture debt:
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Advantages of Venture Debt
Venture debt helps startups extend the time after which they run out of money
(their runway) and help provide the necessary boost to reach certain milestones. This
increases your value to investors without you losing significant control of your business.
Venture debt works great as a safety blanket for businesses that are trying to cover a drop
in profits.
You will have to pay the money back over time along with the interest. Sometimes, to
qualify for venture debt, you are required to keep some assets as collateral.
In case you are not able to reach the goals that have been laid out in the loan contract, your
Considering the aforementioned advantages and disadvantages, we can safely say that
venture debt is best suited to companies that are in the early stages of establishing their product
and/or services. Under such circumstances, you are generally not making any impressive leaps
with your revenue and require quick money to cover expenditures (such as making key hires and
investing in marketing).
Incubation Centres
Incubation centres tend to be like laboratory centres that hatch ideas under one roof. They
share resources as their main contribution instead of capital and offer start-ups a
procreative environment.
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Incubation centres often understand business dynamics and needs which technological
companies face. They provide free office space, consultancy services, Internet access, data contre
facilities and networking opportunities within the same centre and elsewhere. They allow founders
to concentrate on their early stage core competencies of research and development without
As the start-ups mature, they provide mentorship and networking opportunities so that
newly researched and developed products could be cross-sold to other incubates and matured
further before they hit the markets. Another key benefit is that solutions are tested in a cohesive
environment.
Once the need for capital and expansion arises, they work on structuring business plans
and financials. They also provide assistance to plug gaps prior to pitching to venture capital firms
Incubation firms are a great idea for technopreneurs who lack the business know-how and
commercial viability of their products. It is a great place to hone business skills before stepping
out on their own. The downside is that incubation firms will take a 10 percent to 30 percent share
of the equity, depending on the roles they play and the assistance they offer in the projects.
However, the technopreneur should not be too bothered by giving away equity because each party
In recent years, many intubation firms have gotten into big trouble. They were driven by
greed and not performance. Many real estate companies, landlords and Old Economy companies
with excess resources were pushing their services to technopreneurs, trying to build a portfolio of
companies so that they could be pushed to the public. Such firms offered very little value to take
technopreneurs. Technopreneurs should check to see if incubators provide R&D facilities such as
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software development tool kits, application development, training guidance and technical support.
They then need to provide incubates with help on the commercial viability of their products,
feasibility studies, implementation plans and finally with support in sales and marketing.
Incubators also need to understand there is need for additional resources such as hardware
and software licenses which are a requirement for the development of scalable solutions.
Incubators nurture young firms, helping them to survive and grow during the start-up period when
they are the most vulnerable. But an incubation company, just like the venture capital firm, is
driven by its own set of goals. It is therefore important that the incubation firm is chosen carefully
as the wrong choice can kill any or all potential that a start-up may have. Technopreneurs, once
they have decided to work with one, should ensure an agreement is drafted, setting out both parties'
Those who have the management and technical expertise but are too early in the cycle to
approach a venture capital company and do not want to use incubation, could look for an angel.
Angels
The word "angels' brings to mind a fairy in a white dress who comes to ones rescue in dire
times. Well, this is exactly what an angel does for a start-up company. Angels are usually high net-
worth individuals or individuals with a budget for investments. They are often stock market
investors or observers who, understanding the stock market and the valuation theory behind
companies listed there, preer to get closer to the value chain by investing directly in start-ups.
Angels come in different sizes and roles. An angel may be a university professor, an investment
strategist, a business person or even a retired civil government servant. The shared characteristics
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among angels is the understanding of how the stock market functions, the valuation game,
technology innovation and its evolution, and the business need for capital.
His appetite for risk grows as he gets more successful. It is estimated that for most start-
ups, the angel is the key driving force behind them. He is responsible for the largest source of start-
up capital in new businesses. It is extimated that one-seventh of the 300,000 early growth firms in
the US receive funding from angel investors. This translates into over US$20 billion of investments
Angels are not interested in controlling the start-ups business and they will typically invest
in companies within their immediate geographical location. They simply want to be mentors to the
start-up and ensure that their capital is well taken care off. They look for sincerity and honesty in
the founders. Those who simply don't have the time to mentor founders themselves can pay
someone else part of their profits to do the job would simply hand over the management of their
The benefits of going to an angel over a venture capital firm or incubator is that angels are
usually more informal. They do not tie down founders with mandates, milestones and performance
clauses. The angel will simply discuss the opportunity and his potential reward for his contribution,
which may be his expertise or money or both. An angel is less likely than a VC or incubator to
have a hidden agenda, for example, trying to get cheap proprietary information for their portfolio
companies.
The angel does not need to have a complete business plan and seldom questions a founder
on value creation or competitive advantage. He may work with a founder in the early stages to do
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The first search for an angel should usually begin at home; friends, parents, teachers, associates
and others can be a part of the angel chain. Anyone who understands the business of the start-up
and what it is trying to do can be a potential angel. The deal can be closed once the angel trusts
and relies on the founder's goodwill. A deal with an angel can be concluded in less than a month.
If all efforts to get funding fail, start-ups can get capital and assistance from governments
via enterprise grants, innovation grants, or venture capital assistance. When everyone else has
stopped investing due to the economic downturn the only party that can promote the wheels of
commerce are the governments themselves, because start-ups could potentially boost employment,
For governments, the motivation is simple: they need to boost use of technology and they
need solutions which can make businesses react efficiently to economic cycles and changing
business environments. They also want to see companies lower costs, penetrate new markets and
Government assistance can be used for subsidising research and development costs and the
building up of the start-up's core business model. In the US, the Small Business Administration
has funded companies like Apple, IBM and Hewlett Packard. Established since 1953, the SBA has
offered financial technical and management assistance to almost a million companies yearly and
is one of the world's largest financial backers of small businesses. The results speak for themselves.
The added benefit is that government grants need not be repaid. The drawback is grants are in
range of $10,000 to $500,000 only. They are suitable for R&D, not for cash flow. Therefore if a
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start-up is looking for more than R&D money, they should consider approaching government
Fortunately, government bodies operate VC funds. They too operate in the same manner
as commercial VCs. Unlike the latter VCs, the key agenda for government venture funds is to see
how the project will benefit the economy and the country as a whole. Having the government as a
shareholder can open business doors and can provide credibility for the new company.
Because in almost all cases it isn’t true and investors will take that phrase as a sign that you
Once the alarm bells have started ringing, it’s likely they won’t be interested in your
business. This is why it's vital you conduct a competitor analysis when looking to raise capital.
What you most likely mean is that you don’t have any “direct” competitors, but there are
two other types of competition your business may be facing: “indirect” and “replacement”. As way
of a brief explanation: A direct competitor is a business that essentially offers the same product or
service as you do, an indirect competitor is a business which offers a similar product or service but
may be in a different sector of the same market, and a replacement competitor is a substitute for
the product or service offered by your business which doesn’t need to be in the same sector and
won’t be immediately obvious. To find out more and see some real-world examples, check out our
post, “So you think your startup business doesn’t have any competition”. Identifying your
competition is one of the most important things you can do for your business, especially when it
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You need to know (and then relay to potential investors) what else is out there, what they're
doing, and how your business is better, faster, or cheaper than them.
Because it’s not always immediately clear who your competitors are, some entrepreneurs
Analyzing the activity and criteria of your customers, as well as what else is available in
the area surrounding your store, can give you a fantastic insight into why people choose you instead
He wraps up the post with a handy suggestion for how to present your competitor analysis
a. Entrepreneur Media staff. This is an excerpt from the book, “Write Your Business
Plan”, which focuses on identifying what sets your business apart from others and gives it its
competitive edge. Investors want to know that you understand the challenges your business
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faces and in which ways you’re better than those around you. They can’t get this information
from a list of names and they’re not going to do your research for you. Once you’ve identified
the competition, you need to find where your competitive edge lies? For example, is it in cost,
b. Getting the scoop: How to research and identify your competitors. Studying industry
associations, search engines, and startup databases may give greater understanding of what
already exists, what startups are in the works, and what he’s facing.
In order to keep them at bay, you need to monitor them regularly to ensure that you know
what progress they are making. The results are invaluable to any entrepreneur and technopreneurs
looking to identify their startup's competition, whether or not you're raising money.
References
https://www.abstractops.com/financing-alternatives-venture-debt-vs-venture-capital
https://www.growthcapitalventures.co.uk/insights/blog/raising-money-for-your-startup-step-6-
identifying-your-competitors
https://www.cbinsights.com/research/venture-debt-venture-capital-vc-comparison/#:~:text=Some
%20of%20the%20differences%20between,they%20have%20received%20backing%20previousl
y.
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