Funding, money matters for

entrepreneurs & start up

Saurav Banerjee 1
Vitamin M, Nagad Narayan

• Money may not buy you happiness, as Beatles sang, still money and quite lot of it is still required to start
and run a business. Not to raise funding from third parties and own funding may prevent debts and equity
dilution.
• Just like own money is the cheapest & safest, like the ships in the harbour, but ships are meant for seas,
sometimes calm & serene, often turbulent & stormy, startups & entrepreneurs do raise funding, borrow
lend and lease, especially as they grow larger and scale up.

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 Show me the money, honey!
• Funding options - For early-stage startups, for fast-growth mature companies.
• The founders - making an office, machines or a technology license available are investment. Not getting paid salary is part of investment.
• Putting own money, making “skin in the game” is having faith. Others would follow and share the risk and the spoils (if not burn their fingers
along with yours)!
Bootstrapping and self-funding: By leveraging personal savings, credit lines or personal assets, entrepreneurs can finance their ventures without
relying on external investors. It grants startups full control over their operations and minimizes the need to dilute equity at an early stage.
Additionally, self-funding demonstrates commitment and resilience, which can attract potential investors in the future.
3Fs: family, friends and fools
• To cover the costs of setting up a new company or to bridge the gap to a first round of (pre-)seed funding. Investment are not too high and
are typically repaid as a loan (with or even without interest) or are invested in exchange for a small equity share in the company.
Strategic partnerships and alliances: By identifying synergistic organizations or established companies in their industry, startups can propose
mutually beneficial collaborations. Such partnerships may involve strategic investments, joint ventures or co-development agreements, which
provide startups with access to funding, resources, expertise and a broader customer base. This might ease financial constraints, enhance
market credibility and pave the way for future growth.
Government grants and programs: Governments often offer grants, incentives and programs to stimulate innovation and entrepreneurship, even
during economic downturns. Startups can tap into these resources by researching and applying for grants specifically tailored to their industry
or innovative projects. These grants can provide much-needed funding, mentorship and networking opportunities. Additionally, government-
backed programs, such as incubators and accelerators, offer access to valuable resources, expertise and potential investors, further aiding
startups in their quest for funding.
Angel investors -When the invested amounts, share percentages and level of professionalism increase angels enter. Angel or informal investors,
individual or groups, are experienced entrepreneurs who have some funds available (often from previously exited ventures) invest around
50,000 dollars/euros and can amount up to (or more than) a million dollars/euros.
• Angels provide “smart capital”: not just money, but also networking opportunities and knowledge within specific sectors.
• Platforms AngelList, Crunchbase and f6s.

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 Crowdfunding & Venture capitalists
Crowdfunding - The “crowd” finances the funding.
Via an online or offline platform.
•There are three types of crowdfunding: loans, pre-orders/donations and convertible loans.
•Platforms – Kickstarter, Indiegogo & more. For products, projects or gadgets aimed at the consumer market. Dutch crowdfunding platform
Oneplanetcrowd focuses specifically on sustainable projects with a positive impact.
•Convertible loans - 1) no shares are being issued, 2) valuation discussions are postponed until the moment the value of a company can be
better determined and 3) it is an easier, faster and cheaper process than an actual share transfer.
•Raising capital from a large pool of individuals. Directly appealing to potential customers, supporters and like-minded individuals who
believe in their vision. By offering early access to products, exclusive perks or equity shares, startups can incentivize individuals to contribute
to their fundraising campaign. Also helps validate the market demand for a startup's product or service.
Venture capital/private equity
•Professional investment firms that invest in companies that are not publicly listed. They focus specifically on (from the investor’s
perspective) risky investments in early stage companies, for companies that have already passed the “seed stage” and are looking for series A
or series B funding.
•VC’s invest in growth capital of young companies. VC firms have a fund (e.g., 100 million dollars/euros) that has to be invested within a
certain period of time (e.g., 10 years) in a number of companies with different risk profiles to spread the risk across the portfolio to sell the
shares after a couple of years for a certain return/profit.
•VC’s help companies grow faster than they would if growing organically, for instance if a firm wants to internationalize.
•VC firms typically invest in the range of about 500,000 to 20 million dollars/euros. To raise funding from a VC, a company’s
product/market fit has to be already proven, and steadily growing revenue streams have to exist for several years. Few offer seed funds
(starting with rounds of about 200,000 dollars/euros) that offer seed capital to companies that have not met the abovementioned criteria yet.
•VC’s can fund multiple rounds for the same company, where an angel or other seed investor don’t. They have a specific sector focus and
good knowledge/network within this sector.

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Debt financing: the bank
• Few banks have started vc funds, they are generally more risk averse than,, angels, seed investors and normal VC investors.
Banks are more likely to invest in small to medium businesses, in companies with lower risk profiles (than startups,
for instance) and when companies can offer collateral. Early-stage startups having failed to get VC funds, normally fails
to get funding from a bank as well.
• With collateral, a bank is a very good option and for working capital financing, stock financing or financing to cover investments in
buildings/machines.
• Companies generating stable income streams and that have been growing organically for a number of years (less risky) can consider
a bank. Stake or equity is not shared in debt financing, in the long term it is a much cheaper way of financing than, an angel or VC.
Factoring
• A way of financing working capital by lowering the size of accounts receivable. Example: if you send an invoice to a customer, but
it takes the client 60 days to pay, then you can decide to “sell” this invoice to a factoring company (against a certain payment, of
course).
• The factoring company will pay for the invoice (or provides you with a loan) so that you do not have to wait 60 days before the
invoice is paid by the client. A factoring company can also take over the risk that the client does not pay at all.
• When to choose this source of financing: First of all, it goes without saying that you must have clients in order to be eligible for
factoring. If you do not have any paying customers, factoring is not an option. If you do have customers, factoring can be very
useful if you have to deal with long payment terms.
• Do you have large corporates as your customers? If so, it can take a while for invoices to be paid, and there is often not much you
can do about it. In order to keep your working capital position healthy, factoring can be a good solution. Is accounts receivable
management costing you a lot of time and effort? Do you often suffer from bad debtors? Then factoring could also be an outcome.

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Leasing Suppliers

Leasing
•Explanation: Do you have to make large investments in assets such as computers and/or machines? Why don’t
you lease instead of purchasing them? By leasing assets companies can spread payments over a longer period of
time instead of having to fulfill the full payment of an investment the moment they decide to purchase an asset.
•When to choose this source of financing: When a company is capital-intensive, meaning it is dependent on the
use of (sometimes expensive) assets, such as machinery, leasing may be the way to go.
Suppliers
•Explanation: is your business heavily reliant on its supply chain? Then try to negotiate favorable payment
terms with suppliers. If your customers have long payment terms, for instance, you can try to agree to longer
payment terms with your suppliers as well so that you do not run into any problems concerning your working
capital. On the other hand, you could also try to discuss discounts in the event you pay your suppliers very
quickly.
•When to choose this source of financing: Choose this form of financing if you have good relationships with
your suppliers or if you have a good negotiating position with them (for example, if you are a large/important
customer).

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 Initial public offering (IPO)
• An IPO is the public listing of a company, which means that it is the first time a company offers its shares to the general public
(instead of to private individuals, investors or companies). Before an IPO, a company is private, has a limited number of investors that
have invested early stage or growth capital (Founders, angels and VC firms).
• For an initial public offering to be successful, a company must be able to demonstrate years of strong growth, and its proposition
typically includes a certain network effect/scalability. Growth can be defined in several ways. This can be turnover or profit but also,
for example, the number of customers or active users. For example, Spotify has been a loss-making company for years, but has been
growing enormously in terms of turnover and users.
• A company also has to demonstrate transparency and confidence that growth will continue in future years because it has to win the
trust of the general public that the value of the shares (which are bought by the public during the IPO) will rise in the future so that
they can make a profit on their investment.
• For the investors that owned a share in the company already before the IPO, a public listing can turn out to be very attractive
(financially). An IPO should not be underestimated though: it is a very costly process and results in many reporting requirements
toward the public, imposed by strict government regulations.
Revenue based financing
• Explanation: Revenue based financing is a funding mechanism in which an investor provides financing to a startup and in return the
investor will receive a percentage (e.g. between 2% - 5%) of the (future) revenues generated by the startup. The future revenue-based
interest payments are typically capped at two to three times the size of the initial funding amount.
• When to choose this source of financing: This type of funding is typically offered at (pre-) seed stage. The benefits of this type of
funding for startups are the following:
• The founders do not have to give away any equity meaning they will not dilute their equity shares.
• As opposed to a normal bank loan the interest payments for revenue based financing are linked to the generated revenues, which
means that if revenues decline required payments also decline. This reduces the chance of cash flow issues and potential illiquidity.

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Initial Coin Offering, (ICO)

• ICO a company typically writes a whitepaper to pitch a certain business idea and asks the general public to finance the idea
using bitcoin and/or altcoins (other cryptocurrencies than bitcoin). In return, the investor receives an altcoin newly generated
by the company during the ICO.
• Usually, this newly generated altcoin is at the center of the company’s business activities and thus leveraged in a way that
increases its value. As soon as this altcoin becomes tradable, investors can resell it (and hopefully make a profit). An ICO is
therefore very similar to an IPO (see section 12 below), but uses cryptocurrency instead of shares that can be converted into
“normal cash”.
• When to choose this source of financing: It is possible to do an ICO as a non-crypto company, but currently, the majority of
the companies that do an ICO are blockchain/cryptocurrency companies. This is due to the fact that the new altcoin generated
by an ICO often has a function within the company which increases its value. The speculation on the fact that the value of the
new altcoin will indeed increase is what attracts investors.

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• Debt and equity are the two major sources of financing. Government grants to finance certain aspects of a business may be an option. Also, incentives may be available to locate in certain communities or encourage activities in particular industries.
• Equity Financing
• Equity financing means exchanging a portion of the ownership of the business for a financial investment in the business. The ownership stake resulting from an equity investment allows the investor to share in the company’s profits. Equity involves a permanent investment in a company and is not repaid by the company at a later date.
• The investment should be properly defined in a formally created business entity. An equity stake in a company can be in the form of membership units, as in the case of a limited liability company or in the form of common or preferred stock as in a corporation.
• Companies may establish different classes of stock to control voting rights among shareholders. Similarly, companies may use different types of preferred stock. For example, common stockholders can vote while preferred stockholders generally cannot. But common stockholders are last in line for the company’s assets in case of default or bankruptcy.
Preferred stockholders receive a predetermined dividend before common stockholders receive a dividend.
• Personal Savings
The first place to look for money is your own savings or equity. Personal resources can include profit-sharing or early retirement funds, real estate equity loans, or cash value insurance policies.
• Life insurance policies - A standard feature of many life insurance policies is the owner’s ability to borrow against the cash value of the policy. This does not include term insurance because it has no cash value. The money can be used for business needs. It takes about two years for a policy to accumulate sufficient cash value for borrowing. You may borrow
most of the cash value of the policy. The loan will reduce the face value of the policy and, in the case of death, the loan has to be repaid before the beneficiaries of the policy receive any payment.
• Home equity loans - A home equity loan is a loan backed by the value of the equity in your home. If your home is paid for, it can be used to generate funds from the entire value of your home. If your home has an existing mortgage, it can provide funds on the difference between the value of the house and the unpaid mortgage amount. For example, if your
house is worth $250,000 with an outstanding mortgage of $160,000, you have $90,000 in equity you can use as collateral for a home equity loan or line of credit. Some home equity loans are set up as a revolving credit line from which you can draw the amount needed at any time. The interest on a home equity loan is tax deductible.
• Friends and Relatives
Founders of a start-up business may look to private financing sources such as parents or friends. It may be in the form of equity financing in which the friend or relative receives an ownership interest in the business. However, these investments should be made with the same formality that would be used with outside investors.
• Venture Capital
Venture capital refers to financing that comes from companies or individuals in the business of investing in young, privately held businesses. They provide capital to young businesses in exchange for an ownership share of the business. Venture capital firms usually don’t want to participate in the initial financing of a business unless the company has
management with a proven track record. Generally, they prefer to invest in companies that have received significant equity investments from the founders and are already profitable.
• Venture capital investors also prefer businesses that have a competitive advantage or a strong value proposition in the form of a patent, a proven demand for the product, or a very special (and protectable) idea. They often take a hands-on approach to their investments, requiring representation on the board of directors and sometimes the hiring of managers.
Venture capital investors can provide valuable guidance and business advice. However, they are looking for substantial returns on their investments and their objectives may be at cross purposes with those of the founders. They are often focused on short-term gain.
• Venture capital firms are usually focused on creating an investment portfolio of businesses with high-growth potential resulting in high rates of returns. These businesses are often high-risk investments. They may look for annual returns of 25-30% on their overall investment portfolio.
• Because these are usually high-risk business investments, they want investments with expected returns of 50% or more. Assuming that some business investments will return 50% or more while others will fail, it is hoped that the overall portfolio will return 25-30%.
• More specifically, many venture capitalists subscribe to the 2-6-2 rule of thumb. This means that typically two investments will yield high returns, six will yield moderate returns (or just return their original investment), and two will fail.
• Angel Investors
Angel investors are individuals and businesses that are interested in helping small businesses survive and grow. So their objective may be more than just focusing on economic returns. Although angel investors often have somewhat of a mission focus, they are still interested in profitability and security for their investment. So they may still make many of the
same demands as a venture capitalist.
• Angel investors may be interested in the economic development of a specific geographic area in which they are located. Angel investors may focus on earlier stage financing and smaller financing amounts than venture capitalists.
• Government Grants
Federal and state governments often have financial assistance in the form of grants or tax credits for start-up or expanding businesses.
• Equity Offerings
In this situation, the business sells stock directly to the public. Depending on the circumstances, equity offerings can raise substantial amounts of funds. The structure of the offering can take many forms and requires careful oversight by the company’s legal representative.
• Initial Public Offerings
Initial Public Offerings (IPOs) are used when companies have profitable operations, management stability, and strong demand for their products or services. This generally doesn’t happen until companies have been in business for several years. To get to this point, they usually will raise funds privately one or more times.
• Warrants
Warrants are a special type of instrument used for long-term financing. They are useful for start-up companies to encourage investment by minimizing downside risk while providing upside potential. For example, warrants can be issued to management in a start-up company as part of the reimbursement package.
• A warrant is a security that grants the owner of the warrant the right to buy stock in the issuing company at a pre-determined (exercise) price at a future date (before a specified expiration date). Its value is the relationship of the market price of the stock to the purchase price (warrant price) of the stock. If the market price of the stock rises above the warrant
price, the holder can exercise the warrant. This involves purchasing the stock at the warrant price. So, in this situation, the warrant provides the opportunity to purchase the stock at a price below current market price.
• If the current market price of the stock is below the warrant price, the warrant is worthless because exercising the warrant would be the same as buying the stock at a price higher than the current market price. So, the warrant is left to expire. Generally warrants contain a specific date at which they expire if not exercised by that date.
• Debt Financing
• Debt financing involves borrowing funds from creditors with the stipulation of repaying the borrowed funds plus interest at a specified future time. For the creditors (those lending the funds to the business), the reward for providing the debt financing is the interest on the amount lent to the borrower.
• Debt financing may be secured or unsecured. Secured debt has collateral (a valuable asset which the lender can attach to satisfy the loan in case of default by the borrower). Conversely, unsecured debt does not have collateral and places the lender in a less secure position relative to repayment in case of default.
• Debt financing (loans) may be short-term or long-term in their repayment schedules. Generally, short-term debt is used to finance current activities such as operations while long-term debt is used to finance assets such as buildings and equipment.
• Friends and Relatives
Founders of start-up businesses may look to private sources such as family and friends when starting a business. This may be in the form of debt capital at a low interest rate. However, if you borrow from relatives or friends, it should be done with the same formality as if it were borrowed from a commercial lender. This means creating and executing a formal
loan document that includes the amount borrowed, the interest rate, specific repayment terms (based on the projected cash flow of the start-up business), and collateral in case of default.
• Banks and Other Commercial Lenders
Banks and other commercial lenders are popular sources of business financing. Most lenders require a solid business plan, positive track record, and plenty of collateral. These are usually hard to come by for a start-up business. Once the business is underway and profit and loss statements, cash flow budgets, and net worth statements are provided, the
company may be able to borrow additional funds.
• Commercial Finance Companies
Commercial finance companies may be considered when the business is unable to secure financing from other commercial sources. These companies may be more willing to rely on the quality of the collateral to repay the loan than the track record or profit projections of your business. If the business does not have substantial personal assets or collateral, a
commercial finance company may not be the best place to secure financing. Also, the cost of finance company money is usually higher than other commercial lenders.
• Government Programs
Federal, state, and local governments have programs designed to assist the financing of new ventures and small businesses. The assistance is often in the form of a government guarantee of the repayment of a loan from a conventional lender. The guarantee provides the lender repayment assurance for a loan to a business that may have limited assets available
for collateral. The best known sources are the Small Business Administration and USDA Rural Development.
• Bonds
Bonds may be used to raise financing for a specific activity. They are a special type of debt financing because the debt instrument is issued by the company. Bonds are different from other debt financing instruments because the company specifies the interest rate and when the company will pay back the principal (maturity date). Also, the company does not
have to make any payments on the principal (and may not make any interest payments) until the specified maturity date. The price paid for the bond at the time it is issued is called its face value.
• When a company issues a bond it guarantees to pay back the principal (face value) plus interest. From a financing perspective, issuing a bond offers the company the opportunity to access financing without having to pay it back until it has successfully applied the funds. The risk for the investor is that the company will default or go bankrupt before the
maturity date. However, because bonds are a debt instrument, they are ahead of equity holders for company assets.
• Lease
• A lease is a method of obtaining the use of assets for the business without using debt or equity financing. It is a legal agreement between two parties that specifies the terms and conditions for the rental use of a tangible resource, such as a building or equipment. Lease payments are often due annually. The agreement is usually between the company and a
leasing or financing organization and not directly between the company and the organization providing the assets. When the lease ends, the asset is returned to the owner, the lease is renewed, or the asset is purchased.
• A lease may have an advantage because it does not tie up funds from purchasing an asset. It is often compared to purchasing an asset with debt financing where the debt repayment is spread over a period of years. However, lease payments often come at the beginning of the year where debt payments come at the end of the year. So, the business may have
more time to generate funds for debt payments, although a down payment is usually required at the beginning of the loan period.

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• Impact investment and social funding: In the face of economic decline, there has been a growing focus
on impact investment and socially responsible funding. Investors and funds dedicated to making a positive social
or environmental impact are actively seeking startups with a strong mission and purpose. By aligning their
business models with social or environmental goals, startups can attract impact investors who are willing to
provide funding in exchange for measurable social or environmental outcomes. Social crowdfunding platforms
and impact-focused venture capital firms offer additional opportunities for startups to secure funding while making
a positive difference in the world.
•

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 References
• E&Y Communique on startup financing.
• https://www.extension.iastate.edu/agdm/
wholefarm/html/c5-92.html
• https://www.entrepreneur.com/starting-a-
business/creative-ways-startups-can-earn-
funding-in-tough-economic/453600

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