Startup Financing Business Plan

Paper Type:  Business plan
Pages:  4
Wordcount:  1079 Words
Date:  2022-04-04
Categories: 

Companies have a variety of financial sources from the time they are startups to the time they are established. The sources of financing of companies from the startup stage include:

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Pre-seed Capital

Pre-seed capital is the initial investment of funds into the company and is mostly comprised of personal resources. Pre-seed capital is used to fund any issue from research to the initial development of the capital

Seed Capital

Seed capital is also an initial investment in the company and can come in the form of personal savings and contribution by family and friends. Seed capital is employed in the initial development of the product and research (Cohen, & Hochberg, 2014). Seed capital can also come in the form of crowdfunding where potential users of the product invest in the development of the product by contributing actual funds (Ahlers et al., 2013). Seed capital can also be exchanged with a stake in the company by an investor ( Mollick, 2014).

Angel Investor Funding

Due to the limited nature of seed capital from personal savings and contribution from friends and family, angel investing comes in as a source of financing from wealthy people who might be interested in investing in the product. Funds from angel investors are loans that are exchangeable with preferred shares of the company (Wetzel, 1983).

Venture Capital Financing

When the company has done all the research and product development and is already producing units for sale but not making profits yet, venture capital financing from investors may be necessary for correcting the negative flow of cash. Venture capital financing comes in different series notably series A, B, C rounds and can be sourced until the company achieves a favourable cash flow (Gupta, 2003). Each round of a venture capital financing has a different valuation with regards to how the company is doing regarding prosperity. Venture capitalists may include those who also offer technology and marketing services to the company (Tyebjee & Bruno, 1984).

Bridge Loans

Once the company is defined and has profitability, it may be interested in activities that precede an initial public offer like the acquisition of a rival business or management buyout (Lerner, 1994). It needs additional financing to make this possible. Bridge loans will be a source of this financing and always short term. Bridge loans are typically collateralized with some form of security like inventory. Banks and other financial institutions offer bridge loans. Bridge loans are also known as mezzanine investing can be sourced from private investors.

Initial Public Offer

An initial public offer is the first listing of a company in the stock market. The companies' shares of a certain percentage are publicly traded in the stock market to get a certain amount of money. Subsequent percentages of the company's shares can be listed in the market to get additional funding for the company (Black & Gilson, 1998). Listing of companies in the stock market to get funding in the trading of its shares means the company has gone public and is partly owned by the public.

The Possibility of Getting a Bank Loan from the Day of Establishing the Startup

The possibility of acquiring a bank loan for your startup is certain only if you have security to collateralize the loan. In the case of investing, the banks have high credit line requirements and will involve a rigorous evaluation procedure before they lend. Banks will also not invest in a startup that has not developed yet to show profitability and signs of growth. It would be next to impossible to get the bank to lend you money on the day of establishing your startup.

Banks Preference when Lending to Companies

Banks are biased to lending more towards established companies than to small upcoming companies. Banks evaluate the credit lines of the companies and most big companies which are established are likely to meet these lending requirements by banks (Cebenoyan & Strahan, 2004) Established companies have also shown there profitability and growth, unlike startups that are yet to have any profitability.

Role of Venture Capital

Venture capital would be an integral source of financing for the company when already producing products for sale but have issues with negative cash flow (Jeng & Wells, 2000). Venture capital will remedy this negative cash flow by ensuring the company's operations carry on before breaking even (Cumming & Dai, 2010).

Steps to Make the Venture Successful

Protection of intellectual rights

Acquire a patent certificate that protects the invention from other companies who might want to commercialize the invention instead.

Employ a talented pool

Employ a talented pool to share in the company's goal and obligations. Notably, this will ensure that they put in all their effort in ensuring that the company is a success.

Ensure good relation with investors

Maintaining a good relationship with the investors is paramount to the success of a company. Notably, this can be done by informing the investors of every activity undertaken by the entity to secure their essential investments that the company needs to be able to operate.

Study the market

Studying the market ensures that the invention is up to date with the needs of the market. Inventions should meet the needs of the potential clients and existing customers.

Invention and creativity

Constant improvement of products and services should be a norm since it allows a business to shrug off competition from other companies offering similar products.

References

Ahlers, G. K., Cumming, D., Gunther, C., & Schweizer, D. (2015). Signalling in equity crowdfunding. Entrepreneurship Theory and Practice, 39(4), 955-980.

Black, B. S., & Gilson, R. J. (1998). Venture capital and the structure of capital markets: banks versus stock markets1. Journal of financial economics, 47(3), 243-277.

Cebenoyan, A. S., & Strahan, P. E. (2004). Risk management, capital structure and lending at banks. Journal of Banking & Finance, 28(1), 19-43.

Cohen, S., & Hochberg, Y. (2014). Accelerating startups: The seed accelerator phenomenon.

Cosh, A., Cumming, D., & Hughes, A. (2009). Outside entrepreneurial capital. The Economic Journal, 119(540), 1494-1533.

Cumming, D., & Dai, N. (2010). Local bias in venture capital investments. Journal of Empirical Finance, 17(3), 362-380.

Davila, A., Foster, G., & Gupta, M. (2003). Venture capital financing and the growth of startup firms. Journal of business venturing, 18(6), 689-708.

Jeng, L. A., & Wells, P. C. (2000). The determinants of venture capital funding: evidence across countries. Journal of Corporate Finance, 6(3), 241-289.

Lerner, J. (1994). Venture capitalists and the decision to go public. Journal of Financial Economics, 35(3), 293-316.

Tyebjee, T. T., & Bruno, A. V. (1984). A model of venture capitalist investment activity. Management Science, 30(9), 1051-1066.

Wetzel, W. E. (1983). Angels and informal risk capital. Sloan management review, 24(4), 23-34.

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Startup Financing Business Plan. (2022, Apr 04). Retrieved from https://proessays.net/essays/startup-financing-business-plan

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