Our top tips for entrepreneurs
1. Learn to sell "face to face", "one on one" not only your product or service, but also your vision of the business.
2. Buy a financial calculation program and become an expert in all aspects of start-up financing. Lack of understanding of financing issues can significantly reduce your chances of getting an investment.
3. Assemble a highly professional team. Create your own network of sales, financing, management.
4. Learn how to make impressive, compelling presentations to challenging, critical audiences.
5. Learn to check the reliability of those sources that "look too good to be true."
2.3. The language of venture capital
Enterprise stage "start-up"
First, second, third round, mezzanine financing
Private placement of securities
Justification of the viability of the project
Share in business
"Sweat share" (relative value of the entrepreneur's intangible contribution)
Your goal is to find funding. Remember, it is much easier to gain the trust of potential investors if you speak their language with them, or at least understand it well. Many entrepreneurs are sometimes surprised to learn that the expression "venture capital" does not mean funding in the usual sense of the word. This term is used to define a specific type of financing with special conditions and rules. The following are examples of terms used in the venture capital business.
Seed Capital is a source of funding for businesses in the start-up or early growth stages, where the product or service being produced is in the concept or development phase.
A start-up business is counted from the establishment of an enterprise to the start of operations and the receipt of the first profit.
Private placement of securities (Private Placement) - placement of newly issued securities (shares, etc.); offering a limited partnership to a specific, narrow group of investors (usually 35 people or less) on a "personal" basis.
"Dilution" - a decrease in the percentage of ownership in the company, which occurs: due to the sale of additionally issued shares in the securities market; the difference in the price paid by investors in the process of private placement or public financing.
Due Diligence is a process of preliminary due diligence by venture capital firms and other investors of all aspects of a company applying for funding.
Justification of the viability of the project (Feasibility Study) - a study of the potential capabilities of the enterprise to conduct a successful business.
Business share (Equity Stake) - ownership of a certain part of the company's shares, provided to the investor as compensation or additional compensation for various services: advice, management assistance, financing, etc.
Sweat Equity is a system for evaluating the intangible contribution (time, effort) of an entrepreneur to an enterprise.
2.4. Financing of various stages of development of a venture company
Early stage financing
Small amounts are allocated to justify the concept of a potentially profitable business
Funding is provided to complete product development and initial marketing
Funding is provided to start commercial scale production and sales
Financing the growth and expansion stages
Working capital is provided to support growing accounts and build stock
Provides significant expansion cash to a firm that is increasing sales
Provides cash to a firm that is preparing to sell its shares on the stock exchange in the next 6-12 months
Pre-sowing stage. Relatively little money is given to an inventor or entrepreneur to justify their concept of the potential profitability of a business that is under development. At this stage, the development of the product itself (as opposed to "pure" research) receives funding, while market research is rarely funded.
seeding stage. Funding is provided to start-up companies to complete product development and conduct initial market research. These companies may be in the process of formation or have been operating for a short time. In both cases, the product has not yet entered the market. As a rule, at this stage of its development, the company has: a key management team, a prepared business plan, and initial marketing research.
First stage (Early). Funding is provided to companies that have used up their initial capital and are in need of the next round of funding to begin commercial production and sales.
Second stage. Working capital is provided for extended
A company that already manufactures and sells products and needs funds to support growing bills and build inventory. Although the fact of the company's progress is obvious, there is no talk of profit yet.
Usually, such companies have already assembled a core management team and prepared an initial business plan, and conducted at least initial market research.
Third stage. Funding is provided for a significant expansion of the company, which is steadily increasing sales and has already begun to turn a profit. Cash is used to further expand production, marketing, replenish working capital, or to develop an improved product, introduce new technologies, or expand the range.
Interim Financing (Late Stage or Expansion Stage). The company is in the phase of maturity, makes a profit, continues to strive for expansion and is preparing to become “public” within the next 6–12 months, i.e., issue its shares on the stock market for the first time. Often bridge financing is organized in such a way that the invested funds can be returned as a result of the initial public offering of shares on the exchange (IPO). Mechanisms for restructuring major shareholder positions through secondary transactions may also be involved. This is done when "early" investors want to sell part of their shares or exit the project altogether. Bridge financing is also used when a company changes management so that a majority stake can be bought before the company goes public.
Main sources of funding for venture capital firms
2.5. Financing the early stages of development of venture capital companies
Early stage financing is the provision of seed capital to an entrepreneur whose business is at the idea level. Therefore, the raised funds are used for product development and primary marketing. Once the mechanism is up and running, market research is underway, product development is in progress, a key management team is in place, and the next round of funding needed to hire qualified managers, purchase additional equipment, and launch a serious marketing campaign can be rolled out.
Financing provided in the early stages of a company's development enables the latter to start mass production of a product and enter the market with it.