Fund Raising Options (Essay Sample)
Compare the differences between several fund-raising methods
Analyze how fund-raising companies help startups and explain through a working example
Thorough explanation and critical comparison of several fund-raising methods:
1. Venture capital
2. Angel investors
3. Seed funding
Give examples supported by figures, numbers, statistics from selected companies under each of the above categories.
Give examples supported by figures, numbers, statistics from selected companies under each of the above categories.es.
Introduce a success story managed to sponsor its success through one/multiple of the above funding options at the local or international level.
Fund Raising Options.
Logically, small businesses and start-ups would want to raise money to manage business operations. Big corporations as well would need financing for a couple of reasons; expansion, restructuring, or investments. Small businesses are normally locally owned and have no intentions of growing into big corporations. Start-ups on the other hand, start off as small business with high ambitions for growth. Start-up owners have fairly high appetite for risk, thus can become huge success or easily fail. Success, popularity, and financial growth is what most starts-up pursue. Start-ups do emerge from ‘existing markets’, ‘new markets’, ‘resegmented markets’ and ‘clone markets’. Fund-raising companies help start-ups raise capital through various methods that include; venture capitals, angel investors, seed funding, incubators and crowd funding.
Budding entrepreneurs with exceptional ideas are often forced to source for funds to allow these great ideas to be borne into fruition. Venture capitalist fill this gap by providing funds to high risk start-up companies that do not have access to the equities market. Such investors hope to recoup their investment at high rates of return when disposing off the company to new investors. Apart from providing the financial support, venture capitalist offer managerial and technical expertise, they participate in decision–making process and own part of equity of the company.
Before venture capitals invest on a start-up, they first assess the potential for growth that the company has. The quality of the management team. Unique ideas and the competitive advantage are other critical factors that venture capitals look for before settling on an investment. This fund-raising method is advantageous because the founders have reduced personal risk since they get salaries. Moreover, the founders are not forced to raise funds to cover the development cost or face financial hardship at the start. For example, Peter Thiel a venture capitalist became the first investor in Facebooks in 2004. Facebook at that time had only Zuckerberg and his other three cofounders received $500,000 (Cao). By the time Facebook filed for an initial public offer that is eight years later, Thiel owned 44.7 million shares.
Angel investor are high-net worth private individuals that fund a business venture in exchange of equity. In comparison, angel investors use their own private wealth while venture capitals use money of other investors to fund business with hopes of high returns. Angel investors value quality, passion, commitment, integrity, sound business plan, technology, intellectual property, and valuation. More often, they rather see a business venture succeed than gain profits. Angel investing is beneficial to the business owner since the company is not required to repay the funds. On the down side, angel investors typically require a huge stake of the company for them to advance funding. Angel investor may claim 10 to 50 percent of the company. Business ventures are ripe for angel investing when they are beyond the start-up phase. For instance, according to Stamm et al., Mr Camp, a serial entrepreneur invested $220,000 in 2009 becoming the first investor in Uber.
CB Insights’ (2019). Uber’s IPO winners. https://www.cbinsights.com/research/uber-ipo-investor-analysis/
Seed capital refers to the first fundraising stage of a start-up. The founders, their families, relatives, and friends are the prospective investors in this round. The objective of seed fundraising is to have enough money to hire employees and buy office space and equipment. Seed capital is money raised from investors and used to launch a firm. The funding entity receives a portion of the firm in exchange for their investment. When the firm grows and begins to make a profit, the start-up founders can repay the investment, or the financing entity sells its interest to other opportunists searching for start-up investments.
Once the company has a solid user base and regular income, it may go on to the Series A round of investment, which will allow it to increase its user base and product offerings. Angel funding is still prevalent at this level, although it seldom extends beyond it (i.e., Series B, C, and D). As a result, angel investment refers to capital that extends beyond the first round and can extend all the way to the Series A round. In either case, the combined funds are utilized to fund the firm before it can make a profit.
A business incubator is a facility that assists new and start-up businesses in their development by offering services such as management, training, and office space. A business incubator is an aid program that helps nurture start-ups and accelerate their growth. Business incubators are different from research and technology parks in that they focus on start-ups and early-stage businesses. They supply resources, as well as focus and direction.
Getting incubated has a lot of advantages. One, it provides opportunity for start-ups to network with other entrepreneurs and coaches who can give assistance. This might help one lay the groundwork for the business. Second, the connections that start-ups make frequently transcend beyond coaches into networks that may be used to obtain finance, services, and mentorship. Connections and networks may be extremely beneficial to the success of a start-up.
New Venture Challenge (NVC), is a good example of business incubators .The facility is rate as one of the highly successful business incubator programs in the US. The NVC facility located at the Polsky Center has led to the emergence of more than 230 firms, and in return created thousands of jobs ("New Venture Challenge - Polsky Center For Entrepreneurship And Innovation"). Almost 13 billion has been raised through mergers and acquisition through NVC.
Crowd Funding is the use of crowds to generate cash by linking people with skills, ideas, and sellable items with those with the means to invest their way, therefore creating employment, new business possibilities, and fueling the economy. Crowd funding supports various models of raising fund;
Donations model. This model that allows people to make donations in small increments, to a project or venture believing it fosters moral and ethical values that are beneficial to the community. Gofundme uses similar model.
Preorder model. In this model, during a campaign, people make online pledges or pre-purchase the product for later delivery. Example of preorder model includes Kickstarter.
Reward-Based model. This model is slightly different from previously stated models. For this case, investors have the gratification of helping and receive a pre-determined prize or object of value instantly, but there is no equity or ownership. Indiegogo’s platform makes a good example of reward-based.
Equity Model. Involves a large number of “regular” individuals spending small sums to finance early start-ups with the hope of receiving dividends or investment appreciation.
Crowd funding methods are attractive because they do provide access to capital without giving up equity, generates feedback from potential customers on feature sets, pricing points, of
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