how to raise startup capital funding vc

step by step  how to raise startup capital 

How Do I Raise New Capital?

The most common source of startup capital is the business owner him- or herself in the form of credit card advances, home equity loans, and loans from family members. Federal and state governments sponsor numerous subsidized loans and grants for startups through the Small Business Administration and its counterparts on the state level.When these sources are exhausted or unavailable for some reason, entrepreneurs usually seek capital from private sources such as commercial and investment banks, groups established by private investors to exploit such opportunities, wealthy individuals, and venture capital funds. Their proposed investment is usually styled in the form of debt, equity, or a combination of each:

• Debt. The most common form of capital used by startups is debt, and it is secured by the assets of the company including the possible personal guarantee of the owners. As time goes by, the company repays the principal with interest from cash flow. If the business fails, the lenders foreclose and liquidate the assets for repayment, possibly seeking any deficiency from the owners. Asset lenders are concerned with the market value of the assets, not the business enterprise, lending only a proportion of the asset's value to the company in order to ensure repayment. Lenders are not normally in the business of taking risks. While the interest rate on borrowed money may be high, using debt allows you to maintain 100% ownership.
• Equity. When utilizing equity, investors become owners of the business with the entrepreneur, the amount of ownership held by each is dependent upon a negotiation, which in turn is based upon the funds invested and the agreed-upon value of the business (as it is at present, and as it may be in the future). Business valuation is an art, not a science; the conclusion is always subjective depending upon the perspective of the valuator. Entrepreneurs typically want as much money as possible for as little equity as acceptable; investors are the opposite, wanting as much equity as possible for as little money as possible. The final equity proportions and amount of money raised is generally a compromise based upon the eagerness of the investor to invest and the desperation of the entrepreneur looking for money.

Delaying capital infusions from non-affiliated third parties as long as possible (until you can prove the business concept and show revenues) is always the best approach. Investors typically require that entrepreneurs have "skin in the game" before being willing to invest their own money, and prefer you've made progress toward implementing your business plan as well.

3. What Is the Value of My Company?

The value of a company is important because it is the basis for determining the "cost" of the new capital when seeking equity additions to the capital structure. Simply explained, a company with a $1 million valuation and no debt seeking a new capital of $1 million would be worth $2 million after the investment. The old owners would own 50% of the new $2 million company (for their contribution of the old company with a $1 million value), while the new investors would also own 50% interest for their contribution of $1 million cash.Generally, a valuation considers four questions:

1. How much is the company worth today?
2. How much could it be worth in the future?
3. How long will it take to create the future value?
4. What is the likelihood of achieving success?

There are a number of different methods used to value startup companies. Bill Payne, a prominent angel investor with the Angel Capital Association describes four popular methods to value pre-revenue companies, asserting that entrepreneurial projections are "too imprecise" and optimistic to be reliable. Professor Ian Giddy of New York University focuses on more traditional methods of corporate valuation, while a popular YouTube video provides business valuation 101 explanation. Prospective business owners seeking capital must understand the basic concepts of discounted cash flow and the use of market multiples before establishing or negotiating a value for their company.Understanding how your company will be evaluated and being able to affect the valuation positively can enable you to get higher valuations and retain greater ownership of your company when the investment is funded
http://www.huffingtonpost.com/michael-lewis/6-things-you-need-to-know_b_3484069.html
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8 Ways To Raise Capital For Your Startup

1 – Crowd funding

While crowdfunding is still in its infancy as a means of raising money for your startup its popularity is rapidly increasing. Crowd funding takes it name from the fact that your project is funded by the public using their own personal funds. To start with, you propose the idea that you wish to see funded. People can then choose how much or how little they want to give you. Most crowdfunding sites currently use a reward base model where people who invest in a new business venture are given some form of reward such as the product that is going to be produced. However changes to US law will soon allow equity based crowdfunding.
Some of the best crowdfunding websites for small businesses include Kickstarter, Indiegogo, and Fundable.

2 – Angel Investing

After entrepreneurs have made their fortune many of them look to invest their funds back into startup businesses. These are known as angel investors. Some of the worlds largest businesses including Google, Facebook, Skype and Twitter have received angel investing.
The benefits of receiving angel investment go beyond the purely financial. The advice and connections that a good angel investor can offer can be equally as valuable. Angel investors are willing to take on the risk of a brand new startup. There are a number of angel investing networks which connect entrepreneurs and investors. Some of the biggest networks include Golden Seeds, Tech Coast Angels and Investors Circle.

3 – Family and Friends

Your family and friends want to see you succeed and may even want a stake in your potential goldmine for themselves. However using family and friends as a source of raising money can be problematic. It can create a strain that can ruin personal relationships. It is also worth remembering that over 50% of small businesses fail in their first five years often because of factors completely outside of the control of the owners. Make sure that you are not borrowing money that they can’t afford to lose. Put any lending agreement in writing with the terms clearly laid out even if it is a “friendly” loan.
A number of successful businesses have started out with a loan from friends and family, so don’t shoot this idea down, just be mindful about the pitfalls and burdens that may come about in turbulent times. The risk is high but so is the reward when you are able to grow not only your own wealth but friends and families along the way.

4 – Credit Cards

Credit cards should be viewed as a temporary measure between getting your business started and obtaining other financing such as a bank loan. Given the hefty 10 – 20% plus interest rates on many credit cards they are generally not a good source of loan term capital. That said credit cards have been used by many entrepreneurs when their was no other options available. In the mid 1990s the founders of Google initially funded the company using credit cards. While the founders maxed out their credit cards they used the funds wisely, purchasing second-hand computers instead of new ones and open source software instead of off the shelf.

5 – Bank Financing

One of the most common ways that people raise capital for their small business is through a bank loan. Your banker may request that you have your loan guaranteed by the Small Business Association before approval. The SBA is a government agency who will guarantee up to 80% of the value of the loan for applicants which meet their criteria. Alternatively you may be able to offer some other form of security such as your home to get your loan approved.

6 – Second Mortgage

Second mortgages are also referred to as home equity lines of credit. These loans tap into the locked up equity you may have in your home. To calculate how much you may be able to borrow for a second mortgage take the value of your home and deduct the value of any outstanding mortgage. Be aware some lenders may only lend only up to 70 – 80% of the fair value of the home. One of the biggest advantages of using a second mortgage is that the interest rate tends to be lower than with others form of financing. This is because the bank knows it can always recover the value of the loan by foreclosing on your property if you are not able to meet your interest payments.

7 – Venture Capital

Venture capitalists aim to invest in early stage businesses with high growth potential. Traditionally venture capitalists received equity in the business in exchange for funding it. However these days they typically demand a mixture of equity and debt financing.
The venture capital business is based on the idea of a few big wins making up for a lot of poor performers. In fact approximately 3 out of 4 businesses which receive venture capital fail. Because of this venture capitalists look for businesses which have a lot of growth potential. If the market for your business is more modest you may need to look elsewhere for funding.

8 – Business Partner

You might not have the money to get your business started but maybe you know someone who does. Of the Inc top 500 businesses, 28% received seed funding from a co-founder.
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It took me years to finally start saying no to things that would take me away from what really needed my attention. No to meetings. No to interviews, and no to extra projects (for extra money.) When I implemented my daily to-do lists my whole day/week/month changed. I would only accept opportunities if they could come after my to-dos were completed.”

“Know your weaknesses: Knowing your weaknesses is as important as knowing what your strengths are, and even more important as your company grows; hire or have co-founders who are great in areas where you are weak.”
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http://yourstory.com/2013/12/startup-valuation/
 http://yourstory.com/2014/03/startup-valuation-equity-dilution/

 http://seedcamp.com/resources/how-much-money-should-you-raise-from-an-early-stage-investor/

 Angel investors in India typically take up 20-30% of equity for investment worth INR 1-3 crores. This is relatively a large chunk of the company but it is so because hardly one of the 10 companies an angel invests in will give returns and most of the money has to be made via these deals. Anil Joshi, the ex-President of Mumbai Angels, says, “Angels are the first people who put in the money and take the highest risk. Depending on a lot of factors, angles can take as less as 10% as well. Typical valuations are between five to 10 crores.” Pranay Srinivasan of Sourceasy, who has been pitching for investments, says, “Less than 10-12% total for approx $100,000.00 (INR 0.6 crores) for an angel round with the pre-money valuation at $750,000.00 (INR 4.5 crores) is what I’ve seen generally.”

 


The difference between pre-money valuation and post-money valuation is also very simple. Pre-money refers to your company’s value before receiving funding. Let’s say a venture firm agrees to a pre-money valuation of $10 million for your company. If they decide to invest $5 million, that makes your company’s post-money valuation $15 million.
Post-money valuation = pre-money valuation + new funding
These terms are important because they determine the equity stake you’ll give up during the funding round. In the above example, the investor’s $5 million stake means he’s left with 33% ownership of the company ($5  million/$15 million).
Let’s consider a counterexample. Say the company was valued at $10 million post-money instead, implying a $5 million pre-money valuation. This means that the investor’s $5 million counts as half the company’s valuation. He comes away with 50% of the company in this scenario, rather than 33%. Given the difference in equity, you can see how important it is clarify between pre and post-money valuations when discussing investment terms.
http://www.forbes.com/sites/jjcolao/2013/10/14/10-terms-you-must-know-before-raising-startup-capital/