by Jace | Feb 11, 2010 | Financing
BY F3FUNDIT
Who pays the fees, should it be the startup? Most Investors will tell you yes. Or should it be the Investor, which most startups will simply expect. The story is however that is depends on a number of factors.
What are hose factors and how do you know who, when, how, why, what, where, and huh? Well that’s why we’re here to help navigate some of the murkier waters of your startupedness. With that, first thing’s first. You need a solicitor (attorney, lawyer), someone you can trust and who knows the corporate side of things, remember each country’s laws are different so if your an S.A. don’t get a lawyer do deals with Ltd.’s. In terms of getting one, network, network, and then network some more.
Now that you’ve got a solicitor, you can go and start talking about financing. If you were introduced to a BA by someone, chances are they’ll want a finders fee, this can range anywhere from 3% – 10% of deal size, and in some extreme examples has even hit 15%, mostly the % will be a +/- 1% of the market you’re in. Spain averages on the lower side of the spectrum, whereas the UK is on the higher side of it.
Aside from this you’ll have legal fees – issuance of new shares, dilution of your own, and even if you do have an MBA, all this will undoubtedly still be confusing at the onset, add to that a finders fee for a facilitation intermediary if there is one, hourly solicitor rates, administrative expenses, filing expenses, etc… etc… and with a seed investment of say €100.000, those bills can quickly add up to 10-20% of the total investment, and all of a sudden your 100k that was supposed to take your co. international looks like it just might flop on its bottom.
So who pays the fees? At the end of the whole fiasco it’s both of you. If the startup pays from invested capital, it’s really getting a fraction of that invested capital, and if an angel pays then that angel is throwing that money away ontop of the investment. Likewise, if the money comes out of company coffers it’s pretty silly as that cash is inherently dedicated towards operational expenses. In which case if you’re lucky enough to find yourself with a willing investor, we recommend the following.
When dealing with an angel be up front about the fees and additional costs, if you need 100k to get to operational business level 2, find out before hand what fees and additional costs will come into play.
Now, say you do need that investment of 100k into your company to bring it to the next level, fees will be 10% meaning a total 110k for the cash transaction. That 10k will go to lawyers, administrative expenses, what have you, and is a sunk cost, no ends or buts about it. But aside from the lawyers who can benefit from it? The truth is the investor more so than the startup. Why? Because many nations in the EU, (mind you not all, so be sure to look at your local laws) – offer a tax shield for business angels. Meaning, that if I as a business angel invest 100k into company X, I can write of 10-20-30% of that investment off of my taxes for the year of investment, additionally, if the company fails, I may be able to write off an additional say 20%, thus decreasing my risk and making my investment contribution a fraction of the actual sum.
In which case, if you can write off that 10% in year one per se, the investment on behalf of the angel would really be 99k instead of the equity for cash injection of 110k. That shield does not apply to the startup, and your law / admin fees will go on your books as just that, the are not depreciable, the are sunk costs that eat up your cash.
So the next time you find yourself at a round table with a few BA’s or are a BA yourself, just remember that there are numerous things you can do to lower your risk in any new venture. It’s not just about investing, it’s about doing it in an intelligent manner.
by Jace | Feb 1, 2010 | Financing, Statups
BY F3FINDIT
Let’s face it, getting money to finance your business is no easy task, and especially so when you’re talking about recessions where people’s pockets are harder and harder to get into, but say you’ve got a good idea for a business that in any other economy would work, but it just cant provide the 30x ROI that Business Angels (BAs) are looking for now. Nor do you have the capital yourself that you need to develop a prototype, or start selling, so what on earth can you do?
Small Business Loans
Small business loans are a great way to get yourself a prototype or a launch product, but the truth is in this climate banks are just about as stingy with their money as BA’s and most other investors. So the short story is, getting a loan may not be easy, but all the while bring in a biz plan, talk to your local banker, and see if you can’t squeeze any money out of them.
This is one option, but by no means should you stick to this one, and anyways, it’s old, outdated, adds additional risk to the entrepreneur and you may have to put down collateral, which quite frankly is not ideal.
Peer 2 Peer Lending Options
A great option to getting cash is P2P Lending – basically there are websites out there, usually two or three per country, that put lenders and borrowers in touch with one another. The website tends to manage risk, provide the lenders with the borrowers debt rating etc… one such site in the UK, and Italy is Zopa, Spain has Comuniate, and doing a Google search ought to point you in the right direction for the service in your country. Rates are typically fixed, and it’s much easier to get
Crowd Funding
This is by far the favorite, but also requires a bit more leg work than the others, and if time is on your side, we highly recommend trying to get Crowdfunded. What is it though, basically it’s getting the community at large to help fund your project, it’s worked well in the music industry, people have made movies based on crowd funding, as well as started all sorts of projects, businesses, etc… To see a few examples of what it does we recommend heading over to Kickstarter, and as for a quick portal where you can start your own fund we recommend Create A Fund.
When it comes down to funding a project though, we highly recommend offering something in return. After all people are giving up their own hard earned cash to help you reach for the sky, so give them something back, be it a page on your website, a personalized letter, inclusion in materials, adding them in the credits of a film, whatever you feel like.
Another good thing about crowd-funding is that it typically happens via PayPal, meaning if your entire project costs €2000, but the payment needs to be done in stages you can raise your first 500, start the project, etc… and develop it as the money comes in.
Did we miss anything? Let us know.
by Jace | Jan 29, 2010 | Financing, Statups
BY JACEK GREBSKI
You have to be thinking to yourself, what on earth does Burger King have to do with startups. Well, a few months back I was talking with a colleague regarding startups, projects, and someone wanting to buy a portal we had developed for a small sum, and the concept of the burger king opportunity cost came about.
In a nutshell it’s a way to quantify if the time spent working on your project is paying off, or if it’s an utter and complete waste of time, i.e. is my startup worth more than the money I could earn flipping burgers at Burger King.
Now, valuing a startup is no easy task, and most current tools are used to assess whether or not to invest in a company, not whether the entrepreneur’s time is worth the commitment to the idea and startup. However we need to understand and employ these methods in order to find out if you’re time is worth it. Depending on the stage of the startup, methods utilized by investors are
Anticipated Return on Investment (ROI) – which basically states that an Angel Investor should look to invest in companies that can yield 30x Return on Investment, i.e. 100k invested -> 3million return.
Why so high? Startups are RISKY investments and on average at least 50% will fail, as an investor, the portfolio of companies invested in should ideally bring in between 10x-50x ROI. Anything less, doesn’t justify the investment. Can your startup compete with this?
Venture Capital Method – which in its simplest form is
Post-Money Valuation = Discounted Terminal Value / Cash-on-Cash ROI
Post Money Valuation – is the valuation of a company immediately after a round of investment is closed.
Post-Money Valuation = Investment + Pre-Money Valuation
Terminal Value – the valuation of a company at exit, meaning the proceeds from the sale of the company via M&A, IPO where investor ownership is liquidated
Cash-on-Cash ROI – the cash-on-cash return on investment expected for said investment in the year of harvest (exit).
To calculate your BK Opportunity Cost, you have to get the value of your startup today. But how do you do that?
Fundamentally, we have to look at two things.
1. Is your startup able to bring in a ROI of 30x for an angel, and if it is
2. What is its Pre-Money Valuation in the Angel Round, meaning now.
Burger King Opportunity Cost
So for the sake of the exercise, let’s assume the following.
You and your partners own 100 shares of Startup Ltd, which is 100% of equity. And say you’re looking for investment into Startup, Ltd. of 100k in return for 20 newly issued shares, the implied post-money valuation is:
(€100k) * 120 / 20 = €600k
To calculate the pre-money valuation, the amount of the investment is subtracted from the post-money valuation. In this case, it is:
€600k – €100k = €500k
So you and your partner dilute your ownership to 100/120 = 83.33%.
To get the Burger King Opportunity Cost of your business you follow the formula
Pre-Money Valuation – Investment in Project ≥ Possible Salary Received from Working at Burger King * Partners * Time
Using the above example, Startup Ltd. has three partners, you’ve been working on the project for a year each, your Pre-Money Valuation is at €500k and say you invested in the company €100k. And, assuming the annual salary of a burger king employee on a monthly basis is €1000, Your BK Opportunity Cost would then be.
€500k – €100k ≥ €1k * 3 * 12 = €400k ≥ 36k @ BK
Woohoo, it was better off for the guys Startup Ltd. to start the project than to flip burgers.
Why? Because the opportunity cost of starting Startup, Ltd. is greater than the minimum sustainable wage that you can have in order to survive, and for that specific reason we’ve used Burger King, and not the salary of an iBanker, Engineer, etc… however those salaries can be easily applied to the opportunity cost formula.
On the other hand. If Startiup, Ltd. is not able to get Business Angel Investment of a 100k, and instead are only are able to sell their work for €20k, then the BK opportunity cost is €20k ≤ 36k @ BK, and it’s reversed, meaning their time would have been better spent flipping burgers.
Thougths?
by Jace | Jan 28, 2010 | Financing
F3FUNDIT
When it’s time to approach business angels there’s a few things to consider and a few other things to keep in mind, and a few even other things that for the most part are common sense yet entrepreneurs tend to forget about all the time.
But before you’re ready to look for someone that will assist you not only in the next round of financing for your company, but also extend a hand in helping to get the company off the ground, you should consider a few things.
For those who read this regularly, we may be repeating ourselves, but bear with us until we get to the meaty stuff.
Am I a functioning company, and do I have a product or service that I can offer for sale, or am I already selling? If the answer is yes, you can consider starting to contact business angels. If you are prior to this stage in your business development, then we highly recommend you save yourself and the business angels the time and not send anything out.
Now, since you’re ready to seek funding, you’re selling a product, and need a financial boost, here’s some very good, yet very simple best practices on….
Raising Angel Capital….
One: This may seem obvious, but apparently it’s not. Do not send your proposals to angels / angel networks that are not in your industry. If you’re a high tech company, a business angel network that deals with energy is not a good idea to send your summary to. Please stick to soliciting people to the industry that you’re in.
Two: Don’t bother sending proposals to “managed” angel funds. These fund managers are often that, just managers, they invest in companies but offer no outside help, and neither do the business angels. These types of funds tend to result in the following. 1. Companies going bust 2. Funds going bust due to poor investment decisions. 3. Angry investors.
Three: Two goes into three nicely, you want an Angel that can lend a helping hand, an industry expert on who you can count on and someone who will want to actively help in getting the company to the next level. That someone should mesh well with the current management, and aside from playing financier, should also want to mentor. This is VERY important.
Four: When sending out your proposal, executive summary, business plan – wait … actually don’t do the third one, never ever do the third one. “But why F3FundIt?” Because no one who is busy wants to read through 25-40 pages of your analysis, and I mean no one.
Send out proposals/exec summaries that are 2 pages maximum. Any more and it will probably wind up in the bin. It’s not that your sweat isn’t worth anything, your b-plan is in fact a guideline for you and your company, not for your investors. They’ll know if they like your concept in the first 3 minutes, and if something catches their eye, they’ll get in touch with you. At the same time, when you contact them, they can’t honestly say “No I haven’t had a chance to read your two page summary”, can they now?
Five: Something that we constantly hear form Angels are complaints about how poorly the company presents itself, how, after 15 minutes of speaking on the phone with an entrepreneur the Business Angels are lost as to what the hell the entrepreneur is doing. Know business terms, get accustomed to knowing your value proposition and pitching your company – practice in front of the mirror if public speaking isn’t your thing. Be clear, and be concise. Your startup will thank you for it, after all your selling it, and yourself.
Live by it, learn it, and do it. Chances are if you follow these tips and you have a good idea – you’ll wind up getting meetings, or at least phone calls.
And if any BA’s are out there, any other pet peeves you’d like to tell us about?
by Jace | Jan 20, 2010 | Financing
BY F3FUNDIT
You’ve done your leg work, you’re business plan’s been refined about ten times, but it seems like at least a hundred, and you’ve spent every weekend working on it. It’s time to go out and get some funding. Great.
But there’s a rub, a business plan is just a couple of pieces of paper, it’s a guideline for you more than anything else, a place where you keep your ideas, collect your thoughts and reference your vision, mission, and business model. It’s great to use when building slides for presentations, and to send the executive summary to bplan competitions, seed funds, and angels, but the sad truth is, that if you don’t have even a semi functional product, you won’t make much headway.
So what do you do? Well, you can ask your 3F’s for money (Friends, Family and Fools), at least enough to develop your product so it’s ready for testing. Why?
Well in this climate, this recessive climate, investors are keen to keep their money in their pockets, long gone are the days of the late 90’s when a few million was given out without so much as the blink of an eye.
But how do you get people to open up their pockets for you? There’s a few ways.
1. If you’re developing a tech platform, be in internet, mobile, or other, look at your burn rate. If you can’t get out of the red within 3-6 months, the odds are stacked fairly high against you. Your idea may be profitable in a year or two, but there’s just no money out there right now to support that. In today’s climate you have to be out of the red quickly.
2. Pool micro Angels. What’s a micro angel you ask? People who are willing to invest €, £, $10-40k. They like to invest and enjoy the risk but don’t have the capital of an angel who can throw 100-300k at your company. Pool a few of these and you’ve got an investment at the capital level of an Angel.
With that being said, remember, you don’t need a check cut out for the whole lump sum in one go. Let the micro angels know when you’ll need the money and at what milestones. Do you need 5k now, and then another 3k in a month, and then 10k three months from then? Small sums are much easier for people to manage than is one lump sum.
As you’re developing your idea, be sure to keep the micro Angels informed of progress. For them the investment means a lot and they’re emotionally betting more on you than a larger Angel network.
3. Once you’ve got a functional prototype, you’re ready for the Angels, now’s the time to network and bring what you’ve worked on to them, you’re ready for the capital injection of 100-300k. Here’s however where you and your Micro Angel need to make a decision, do they stay on with their small % equity stake in your company, or do they convert it into the recently sourced cash?
If possible, use the cash for operational activities, cash at this point in your company’s life is the most important thing in the world, no cash, no progress, and bets are you might not be able to acquire a bank loan due to the stringent climate. All the same, the Angel in all likelihood will not want you to using their money to pay back your rich uncle, so try and keep the micro angels on board until you’re generating healthy cash flows, and / or are ready for Series A funding.
by Jace | Dec 16, 2009 | Financing
You’ve got your business off the ground, you’ve secured some financing, you’re cash flow positive, and business is good. Great! But you need to expand into a new market and to do that you need cash, it’s time to start researching European venture capital.
Your 3f’s (friends family and fools) are all pretty much exhausted, and Angel Capital’s already been spent in your national expansion efforts. So now it’s either debt or venture capital…
And while we won’t go into the semantics of why we’re recommending a VC injection rather than debt acquisition (just yet), we’ll just say that this option is the better one for your business at its present juncture.
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