Thursday, June 7, 2012

How to Raise Start-Up Capital

Raising Start-up capital is a very important task for a small business. Start-up capital can be raised in many ways. The most popular ways of raising capital are venture capital, private equity, bank loans and funds from friends and family. Most entrepreneurs are able to put in a small amount of capital in the initial stages. Once the start-up is operations, the expenses rise and the business requires additional capital. Raising capital through the Venture Capital and Angel fund route is one of the best ways. This is because bank loans might add to the interest burden. The interest burden hinders a company from concentrating on the core operations of the company. Raising capital through venture capital requires the entrepreneur to sell a percentage stake to the business. Venture capitalists are usually experienced entrepreneurs. The Venture capitalists on the board can act as mentors and help you take decisions. The VCs may have contacts that can be of great help in the early stages of your business. Having a prestigious VC on board can also boost your image significantly.

Since there are thousands of small businesses who try to raise capital, it is challenging to raise capital through venture capital route. You should prepare yourself for a VC pitch. A well documented business plan is a must for a start-up. The business plan must include sections on the concept, unique selling point (USP), target market, demographics of your customers and financials. There must be clarity in your business plan. The financials must include 5 year projections. Reasonable estimates and assumptions are a must while projecting financial statements. Another mandatory section on use of proceeds must be included in the business plan. Some venture capitalists may ask for sections on pre-money and post-money valuations of the business. The pre money valuation is the value of the company before money is injected by the VC. This helps them decide on the percentage stake for which they are willing to invest a certain amount of money. For instance if the pre money valuation is USD 1 million, a VC investing USD 500,000 would require a 50 percent stake. It might be preferable to seek professional help in drafting a business plan. The venture capitalists are experienced people who value honesty, ambition and intelligence. Hence, it is best to be honest in the business plan.

There are wide varieties of venture capitalists. Some VC funds focus only on technology companies. Significant research is recommended before approaching a venture capitalist for funding. Some companies provide funds only after the startup is generating a certain amount of revenue or net profit. Visiting the websites of venture capital companies can help in understanding if the VC is suitable for your small business. While pitching for raising money, it is necessary to be confident. A VC pitch should be rehearsed many times. Having a checklist of probable questions from potential investors will help the entrepreneur. The entrepreneur should negotiate appropriately and arrive at reasonable valuation for his startup. Legal help can be sought if the VCs agree to fund your startup.

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