Start-up Funding Explained, Part 1
Over the course of writing at Black Web 2.0 we have met so many smart and talented web entrepreneurs. Many of whom have been looking for or considering some type of funding. We thought it would be helpful to publish a series of articles that may help clarify the funding process and various aspects of seeking funding. You should know we are far from experts on this topic which is why we solicited help from an expert. Robert Greene over at Syncom Venture Partners was kind enough to take time out of his busy schedule to help with developing content for this series. Here’s a little info on Syncom if you are unfamiliar with them:
Syncom is the leading venture capital firm primarily focused on early to mid-stage investments in underserved segments of the media and communications industry. Syncom pioneered this investment strategy beginning in 1977 and has been involved in the creation of many of the most successful and visible African American- and Hispanic-owned media and communications companies over the last 30 years. A number of Syncom-led media and communications companies representing in excess of $10 billion in enterprise value have gone public or been acquired by major companies. These include: BET, Radio One, XM Satellite Radio, Z-Spanish Radio Network, Buenavision Cable, District Cablevision, El Dorado Communications, and Puebelo Broadcasting.
The “Start-up Funding Explained” series will be posted on Mondays and there are 5 parts in this series that you can look forward to seeing every week. Here’s this weeks:
The Venture Capital Process:
Founders Capital
- The more of this type of capital used to start your business the better off you will be in the long run.
- Founders invest to fund the dream.
- Greatest risk involved
Friends & Family
- These are people not necessarily looking for an economic return they generally just want to help.
- Typically have some personal connection with the Founder.
Angel Investors
- More than likely these are investors who have made money before investing.
- They invest because they want to get in early on a business that is likely to have high growth.
- Generally looking for a significant return.
Venture Capital
- These investors understand the risk involved.
- Generally they know the sector the business plays in.
- Are only interested in start-ups that have some institutional value.
Expansion Capital
- These investors see the trajectory of the start-up.
- Start-ups who fall in this category are profitable and have resources and assets to secure the investment amount that is being sought.
- Used to expand an already profitable company.
- This type of investment is the least risky of all types listed above.
Common Misconceptions:
- Grants exist that will help you fund our company that you don’t have to repay.
- If you simply have an idea that it is worth funding.
Steps to take before looking for funding:
- Very clearly map out your business. Don’t over look gathering primary market research.
- Build an experienced management team. Experience should be related to your core business or include comparable experience outside of your industry.
More information on start-up funding and wealth creation can be found at the Marathon Club.
Category: Capital, Startups, web 2.0 | Tags: Start-up funding, Start-up Funding Explained, Syncom, Venture Capital
About the Author Angela Benton is the Founder and Publisher of BlackWeb20.com. Her experience spans a variety of industries including consultative relationships with companies such as UPS, Bizjournals.com, Realestate.com, and Lendingtree.com.
See all posts by Angela.
OK. Let's look at this another way.
First, investors don't invest primarily in ideas. They invest in people, as in teams of people … not typically just one person. So, if you have a good idea, you'd better be able to sell it to someone(s) who is willing to join you in bringing the idea to fruition. That's called recruiting. If you're a good recruiter, investors will be more interested in you and your team.
Second. Founders have to take the highest risk of everyone. Empty your pockets. No one is going to put their money at a higher risk than the founder. If you're not committed, how can you ask anyone else to be?
Next. Family & friends (some say FFF: family friends, and fools) will put their money out there … along with the relationship they have with you. I stayed as far away from this option as possible. If you value your relations with family and friends, you will think long and hard before asking them for investment funding. One exception I made: I took my wife and kid for the wildest ride of their lives … but only because my wife agreed. And since she's a real angel (not monetary), I've been blessed by her even in the most difficult times.
Banks and other financial institutions. To get a loan from any institution, including government-backed agencies, you need two things: good credit and collateral. If you don't have both in abundant supply, find another route. And even if you do, be careful. Most startups fail. If you have a loan hanging over your head and you fail, you lose all your stuff.
Angels: After you've bootstrapped up to the point where you have something to show, you've got traction, revenue, the business is running, you have a business plan, powerpoint presentation and a dynamic energetic personality, spend the next 6 to 9 months chasing angels. If nothing else, you will learn as much as I have about what investors are looking for. And you will never learn that in college. Angels will want from 10 to 30% of equity in your company. Angels want anywhere from 10 to 20 times ROI in 5 to 7 years. They will bring with them interest, support and perhaps expertise. They may also want a seat on the board.
VCs: When your business has hit significant milestones and is now ready to expand and ramp up significantly, VCs will likely be as interested in you as you are in them. They want to see potential to capture portions of huge markets (see billion-dollar spaces). They will also want a board seat, controlling interest and likely your job, Mr. (or Ms.) former CEO. If you can't demonstrate a 10 to 20 times ROI inside of 5 years, you shouldn't bother a VC. And one more thing if you're looking at VC funding, know the answer to, “What's your exit plan?”
A great article!
The bit I thought is often misunderstood is that “If you simply have an idea that it is worth funding.” – Its simply not the case. Good ideas may get funding and great ideas are most likely, of course. But you’ve still got to have the ability to SELL the idea to Angel Investors.
Thanks for the info but how can I get the funding to Build an experienced management team. I have had this problem from the start no money to hire that experienced management team. I started my first urban video sharing website in Feb 22 2004 then my next website stillhustlin.com Apr 04 2005. I posted my first videopodcast in late ’05 to be like the first urban videopodcast in iTunes and I still can’t find funding can I get some help please.
Excellent topic and, unfortunately, rarely discussed in minority communities. TechCrunch50 had an excellent forum on raising capital. I’ll post the link if I can find the video.
Great post guys! I look forward to the others in the series. Very impressed! Online entrepreneurs need a inside look on funding — a book can only tell you so much.