corporate finance 101 learning path, learn bootstrapping, financial statements, and business finance

0:05 there are many reasons why companies look for Capital those companies can be startups established companies or not even companies yet but just business projects they can be online or brick and mortar companies they can be technology companies or more traditional ones but the one thing that those companies share is the fact that they're trying to achieve something and they need Capital to achieve it that something is usually a self-contained project or in other words a project that is specific in nature and that is time-bound for example the development and launch of a product is a self-contained project that could require Capital that the company does not have the

0:51 company therefore has either the choice of waiting until it has enough money to develop and launch the product or to look for Capital in order to do the development and launch as soon as possible some projects can wait to be started when you have the money and other projects simply need to be started as soon as possible before the opportunity disappears for a business project although it looks like it could be different even that the company doesn't exist yet it is pretty much the same thing a business project is a company that has not started yet and has its founder as its one and only employee it usually needs to develop and launch its first product and to do that it just needs more things than an established company already has such as office space or employees in

1:41 essence a new product in a new business is pretty much the same when it comes to raising capital some of the reasons companies raise Capital are the development and launch of a product that requires significant funds upfront a good example would be if you decide to develop a new product then need to produce a certain quantity of it and store it until it is sold the cost of all those steps can add up to a significant amount and therefore requiring you to raise capital or to overcome a significant barrier to entry in a market this can for example be seen in the biotech or pharmaceutical Industries where you need to do a lot of research before you get to a product that can be sold and even then that product needs to go through many types of approvals and certifications

2:29 before it can be put on the market or also the need to grow the company at a very fast pace to gain a Strategic Benefit from being the market leader let's take for example a company that sells a product to the banking industry then the company has a quite low number of customers it can sell to once its product is ready for launch the company could need capital in order to put together a sales team that can take over the market as fast as possible before the competition gets in the benefit here will be to build a stronghold that would be very difficult to take over for any given competitor you need though to be careful to always have a time-bound element to the reason you're raising Capital even if the deadline is very far in the future

3:15 an error sometimes made by entrepreneurs is to build a company that requires regular injections of cash in order to survive a key element to the success of business is ultimately to be profitable and self-sustaining which means that once the project for which your raising capital is delivered then your company should be able to continue to thrive on its own there is no one strategy to raising Capital there are many strategies and each one of them is unique to your personality your business and the stage of development or companies in if you read the business news you might be used to seeing a lot of articles about Venture capitalists investing millions of dollars into businesses but venture capital is better part of the capital investment

4:05 landscape there are many other sources of capital and each has its set of benefits and limitations but first it all starts with you as an entrepreneur for example how easily can you share information about your company with the outside world without being afraid of having your ideas stolen some of the strategies out there involve a fair amount of information sharing with potential investors to be able to tap into those sources of capital you need to share your vision why you believe your business is going to succeed and your business model which in other terms means how you're going to make money we have a tendency to overrate the risks we Face by sharing our business ideas but nonetheless you have to assess how comfortable you are with sharing Vital

4:54 Information about your business if this is a big No-No for you then you need to build your strategy using sources of capital that allow you to share little to no information about your business then the type of business you will be running makes a big difference as well if you're looking to start an online business your funding needs will be much lower than if it's a brick and mortar business online businesses require very little Capital when compared to the relatively Limitless return it can provide if on the contrary you're looking to open a shop you're going to have significant upfront Investments to make and will therefore have to tap into more sources of capital if you start a consulting firm which is pretty much a business around your main

5:40 competency that can be started as soon as you have business cards and a computer for that type of business you might actually not even need any funding and the sole investor is going to be you if on the contrary you decide to manufacture a product and sell them online or through Distributors then you will have to secure enough Capital to get the initial inventory and store it somewhere there are many different types of sources of capital out there and depending on what type of entrepreneur you are what business you're in and at what stage of development or company is in you'll see that there are a number of paths you can take there's no right or wrong answer to how to raise capital for your business but there are better fits depending on your unique situation

6:31 when it comes to sharing our ideas with other people many of us have the tendency to overwrite the true risk of doing so when I have a good idea I have the reflex of wanting to keep it to myself as if I was taking the risk of losing it to a potential competitor just by talking about it in reality there are very little chances of that happening and for very logical reasons of course I'm not saying that you should tell everyone about your idea just because there's very little risk of it being stolen but nonetheless there is no reason to keep it only to yourself to the point of hindering your development efforts first it takes a big even a massive effort to start a new business and out of all the people

7:20 who happen to have a good business idea or hear of one for that matter only a tiny portion will actually think about doing something about it maybe only one percent and out of that one percent maybe just another one percent will actually do something about it so if we quickly do the math here that means that only one person in 10 000 you're going to be telling it to could actually do something about it which means that if you talk about your plans within your circle of friends or to your family the probability of it resulting in someone stealing your idea is very close to zero my conclusion here is that there is no true reason to hold back and not share with your friends and family about what you're trying to achieve then you could tell me that you will talk

8:10 about your project to potential investors who have the means to steal your idea and actually are looking for ideas here again I don't think this is a true representation of how things work investors are actually not looking for ideas investors want to invest in businesses that have the idea and have demonstrated their ability to turn the investors money into 10 times what it's worth if you see a great entrepreneur coming with a great idea why would you go through the trouble of finding another entrepreneur to do the same thing isn't that a pure waste of time if you need Investments do share your ideas and business plan with investors and by the way we don't hear so much about Investors putting together teams or businesses around an idea

8:58 the simple reason is that this is actually the job of the entrepreneur himself not the investor when someone is an investor that means he wants to see the whole package not just the idea third even if you were to tell your idea to that one person in ten thousand or that to that one of a kind investor who wants to steal your idea then what's the worst thing that could happen you'll just have a competitor in front of you once your business is thriving you'll attract the eyes of many individuals and companies that will want to get a slice of your Market competitors will pop up all around you and only the fittest Will Survive so what difference does it make that you get that first competitor a bit earlier than anticipated

9:48 we all tend to not talk about our business idea because we want to be the first to hit the market but being the first to Market is barely an advantage okay you might get a few more sales at the beginning because you're the first to offer that product or service but very quickly as competitors join you in offering that product or service you will most likely have no benefit left from having been the first even worse being the first is sometimes a big risk as you invest a lot of money on an idea that has not been tested yet for which the market could not be ready some of us just have the vision a bit too early and take a bigger risk of failing and in that case being the second one or actually the third one in the market is actually sometimes an advantage because you get

10:37 to see what your competitors are doing right or wrong well I'm not saying that you should walk around with a sign on your back explaining your business model I don't think either that you should hold back from sharing it with investors or telling your friends and family about it raising Capital takes time not an infinite amount of time but it usually takes a few months between the time that you put together your business plan Define your Capital search strategy start meeting with potential investors secure the deal and get the funds it can easily take six to nine months what that means is that if your business needs that Capital to start its operations you'd better

11:23 think twice before you quit what you're doing now at least until you know in approximately you'll get the funds it also means that raising capital is rarely the solution to solve an urgent problem if you need Capital right away to save your business or to start it fast to solve a personal situation then you'd better look for other options that yield more immediate results in order to raise Capital successfully I think it's important to understand who investors are and what they're looking for when they review business plans I of course won't be trying here to give you a one-line description that will cover all the types of investors given that each person is unique and has his or her own objectives and way of thinking

12:14 there are though common traits to many of them which every entrepreneur would be wise to take into consideration the first thing is that despite what people usually think most investors are or were successful entrepreneurs or had a very high profile job in a large organization many of them have been in your shoes starting projects raising capital and they know exactly what you're going through they also know what it takes to being a successful entrepreneur they also have seen their share of businesses that failed and are aware of business plans that are too optimistic enough entrepreneurs who are too confident and not ready to hear their feedback the feedback is very valuable because investors usually have a great deal of experience starting

13:02 a business and raising funds you should definitely hear what they have to say you could be saving tons of time and blunders by listening to and implementing their feedback there is one thing they all have in common they invest in your business to make money which means getting more money down the road that they have invested at the beginning and they will not be looking only at your Revenue projection which will surely be optimistic but also as what you're going to spend the money on and when you spend it because those are elements of your business that you can play with and secure and maximize return on investment investors all have their unique characteristics and goals but remember to keep the investors point of view in mind as you're pitching your project or idea to them

13:47 before you even start meeting with investors you need to have the answer to this key question how much Capital do I actually need to answer that question you actually need to have a very good understanding of how your company is going to make money how it's going to acquire and retain customers how much upfront investment is required how much day-to-day expenses you'll have any Investments you need to make along the way how fast you'll start seeing your first dollar coming in and last how long will it take for your customers to pay you once you made those sales with answers to those questions and some simple math you should be able to come up with an answer the one thing you need to keep in mind though is that you're going to need much more than

14:37 your initial investment apart from the original investment there are two things that weighed heavily on your Capital needs the first one is the salaries you'll have to pay including yours and the second one is the time it will take to sign your first customer and get paid if you already have a customer that's a great way forward and a great way to reduce your Capital needs foreign there are four big sources of capital within which we can fold all the usual sources we know such as crowdfunding Venture Capital Business Essentials loans and so on those sources are the following your own money coming from the operations of your company debt and equity

15:26 let's look at each one of those in detail let's start with your own money the first question we need to answer is why are we talking about your money when in the first place you're following this course to understand what other sources of money there are there are three reasons why we need to talk about your money the first reason is that we talk about your money we talk about any money you can get through your own means or can get from your family so in that sense it is money that you will have to ask for just as you would do with investors you don't know the second reason is that you have to put your money into the project if you want to have credibility when meeting with investors if you don't put your money into your project then how can you expect anyone else to put any money as well how can you convince anyone if you have not convinced yourself

16:17 the third reason is that many entrepreneurs don't pay themselves for a few months and when they can afford it it can even last for more than a year and in essence since they have to pay their personal expenses with their savings for example you can consider that it's just the same as investing money into the company and using it as a salary so if you work for your own company and don't pay yourself any salary or just a very small one and need to compensate with your savings for example then you can consider your investing money into your business another great source of capital is the operations of your company in short if your company generates a profit you can use that profit to fund your business and therefore need less money from outside investors many entrepreneurs

17:03 start their company when they found their first customer and can therefore dramatically reduce their Capital needs so the key idea is to keep in mind here that the earlier your company turns a profit and the less Capital you will need next in line are debts usually people don't like to have debts but for a company when you can afford it it's a great way to find Capital without having investors interfering with your business decisions contrary to the equity option that we will see in a minute with that it's just like the regular loan you can get for your personal needs you know upfront how much you get and how much you will pay back therefore there are no surprises the downside is that you'll have to start paying back from almost day one which will lay heavily

17:51 on your finances so the more you rely on debt the more you have to generate Revenue fast and insufficient quantity to pay those monthly repayments the last big source of capital is equity Equity means selling share from your company in exchange for the capital you're looking for you could for example sell 40 of your shares for one million dollars you would then have the million dollars you need and Will Remain the owner of 60 of your company the upside here is that there is no monthly repayment and the investor is in the project with you for good or bad the downside is that since the investor is looking to make a big return on his investment he will be participating to the decisions you make at least the key ones and will have a say in

18:39 your strategic choices the other downside is that you don't know in advance how much money you will pay back for that investor money the investor himself will be entitled to a portion of your profits and down the road it could add up to much more than your originally received from him so you'd better be sure that this money is really needed and that you are really getting a great deal you'll also want to make sure you have tried every other option before resorting to giving away your shares depending on your specific situation you'll have to consider tapping into one or more of the sources of capital deciding which one to use and when is strategy you'll have to Define

19:28 one thing you could wonder and rightfully so is to know if you are better off raising all the capital you need in one go or doing it step by step let me guess once would be better of course most people would think that let's imagine you've prepared your business plan and you know you need a hundred thousand dollars to start your business then it just sounds logical to find that amount and if you get it now it's even better since you'll then be able to focus on your business and not raising Capital every other week the only thing here is not only do investors prefer to invest step by step but it's actually better for you let's take the example of raising Capital through Equity or in other words the sale of shares of your company since you are selling shares of your company then

20:17 the higher the price of your shares and the more money you will get say differently the higher the price of your shares and the less shares you have to give away for the amount of capital you are looking to raise so the higher price of your shares and the better off you are if your company is successful which you definitely should be planning on then as time will pass the value of your company will increase and therefore the value of your shares will increase as well so technically the more you wait before raising Capital through equity and the better deal you're getting the only problem is that sometimes you need money right away to get started so instead of asking for all the money you need maybe you should ask only for a portion of it which will get

21:05 you to give away less shares and will give you the time you need to raise the value of your company and sell some more shares but much less than with the other raising all at once plan so potentially instead of raising one million dollars with 40 percent of your shares you could raise half a million dollars with 20 and later on another half a million with only 10 or maybe even five percent so in the end getting the same one million dollars for 25 of your shares instead of 40. let me tell you why investors prefer to do it by step as well first and as we'll see later on some investors specialize in certain maturity levels for companies

21:52 some investors do seed investing which focuses on real startups that are barely starting some in the development of startups that have proven that they have a profitable and sustainable business model so some investors will be interested to do only a portion of the way with you and offering them the opportunity to invest in a single step will open more doors for you another reason is that your company will grow by stages for example there could be a product development phase which might not even generate any revenue and will focus on putting a product on the market then it could be followed by a sales phase focused on getting a certain number of customers and becoming profitable the third step could be a marketing one with a focus on getting the world to recognize you

22:42 so that at least some of the sales come from people or companies wanting to work with you some investors will be interested to work with you on only one of those phases and sometimes bring with their Capital their skills and the network which will help you grow the company in short investors like to invest by steps and they call those steps milestones there's a common sequence of events to find in the capital you need for your company I mean after you have evaluated how much money you need and that you've done everything you could to make it the smallest amount possible the common sequence is the following first fund as much as

23:27 possible with your own money second get as much loan money as your company can afford to carry third get the rest of the capital you need through Equity or in other words the sale of shares the logic behind the sequence of events is that as an entrepreneur you're interested in maintaining as much as possible control and ownership of your company as any entrepreneur in his right mind when you have an awesome project that you know you'll be successful you'd rather split the profits with as few people as possible that logic means that you would want to investigate every possible way to get the capital you need without sharing the ownership of the company at all if possible and as little as possible if there's no other choice

24:13 of course in your particular situation you could consider that it's well worth giving away a large portion of the ownership but you will be likely to reach that conclusion once you have done everything you can not to do it and ultimately decide to do so because that's the most probable way of being successful at raising the capital you need and get your project going so this sequence first starts with your own money and that includes any money that you won't have to give back at all it includes any savings you have any money given to you by family members for example the Second Step then is to secure one or more loans the great thing about loans is that you know from the beginning how much is going to cost you and for how long no one is going to interfere

25:04 in your day-to-day management of the company the downside to loans is that you usually need to start repaying right away and that creates an obligation for your company from day one you therefore need to grow your business as fast as possible to have the means to pay those loans once you have exhausted all of the above you're pretty much left with finding investors those can come in many forms such as Venture capitalists or business angels for example they will lend you money and you won't have to repay a dime in the short term but the flip side is that they now own a piece of the company as well and you therefore have to report back to them regularly agree with them on key decisions and of course split the profits once you have some this is the reason

25:53 why it usually comes as the last option where are those entrepreneurs who are looking to have a bus a central element to the entire process of raising capital is having a business plan to present to investors so let's quickly go over what A business plan is and what it should encode this is a very large topic and I'll just present briefly what a business plan contains A business plan is a document that you can either share in printed version or electronically which provides not only an overview of your business but all the elements required for someone completely external to your business to be able to understand it it's a complete overview of your business both from

26:43 the inside and the outside the inside of course is about you and your team your product and services your strengths and weaknesses your strategy and your ambitions from the outside it's the market you're in what your customers need what problems they have and that you're going to solve it's also who your competitors are what they're offering and how the answer to the problems you're trying to solve if they actually do there are sections that are common to all business plans and those are an executive summary which is a two pages Max document that is very well written and sums up all the key elements of your business but more important who creates the excitement of investors

27:31 so that they want to get in contact with you to get you to present your business in more detail investors usually first review executive summaries before they ask for a complete business plan a company description which explains who your company is what it stands for and where it is on the path to its mission is it still just a project on paper or have you started are you alone or with a team have you started doing a real business you need to bring the investor here up to speed on where you are with this company you also need a market analysis let's be clear on what the market is the market is where customers and companies meet and is materialized by the sale

28:17 of products and services you can represent the market with words by describing the profile of your customers are they teenagers in the workforce senior citizens a minority who your competitors are are they proposing low-end products or high-end ones are they selling another version of your product or an alternative product such as tea for example when you compare it to coffee and it can be represented in numbers through the total number of dollars spent by customers over a full year buying that product you could be targeting for example a one billion dollar market which would mean that over a full year all of the people who buy your product are a similar product have

29:04 spent together one billion dollars then describe the product or service you're going to offer what problem it solves why customers will need it how is it different from what already exists once you have covered all of those elements comes the time to talk about yourself and your team who you are what skills you have why you will be the right person to make this project successful ideally be able to show that you're not doing this for the first time but if you are white shows that you will be successful at it and then you'll have to present yourselves and marketing strategy while concrete actions you will be taking to make things happen and ignite sales and show that

29:49 you won't be waiting for customers to come in and last a business projection showing the financial impact of your entire plan which by the way will have to show why you need the money you're trying to raise in any case preparing a business plan has many virtues it will help you define the building blocks of your plan and assess what it takes to be successful you should prepare it just as much for yourself as for the purpose of raising capital it actually is the first step of your journey

30:36 in this course and when you are raising capital in general you'll be talking Non-Stop about the value of your company this is a critical element of raising capital and especially when you're raising Capital with equity when doing so you are in Short Selling shares of your company in exchange for the capital you need by doing so you therefore are left with less shares and are not anymore the only owner of the company for example you could be raising one million dollars for 35 percent of your shares that would mean that after you successfully raise those 1 million dollars you will be earning 100 minus 35 of the company or in other words we'll be left with 65 percent of your company and your investor will earn 35 of the company the big question then is how many shares will you be

31:28 giving for the money you want and that question is answered with the valuation of your company once you and the investor agree on the value of your company then you know the value of 100 of your shares if you divide it by 100 then you know the value of one percent if for example you agree that your company is worth one million dollars then if you divide it by 100 then you know that one percent of your company is worth ten thousand dollars in that case if you need to raise one hundred thousand dollars then all you need to do is give away as many percentages as needed until you get to that amount

32:14 in this particular example you need to give 10 percent so the more your company is worth and the more shares you keep and the process of estimating the value of your company is called the valuation of your company so everyone is interested in the valuation of your company and the entrepreneur you and the investor need to agree on the value there is no one way to value a company there are many ways and everyone has a different opinion on the best way to do it so be ready to negotiate exchange opinions verify numbers because that's going to take some time as you might guess it's in the best interest of the entrepreneur to have a high value for his company and in the interest of

33:00 the investor to Value it low at the end this needs to be a win-win so it's important to debate and find a value for the company that seems realistic for both the entrepreneur and the investor Milestones are another big thing that you need to put in place in your plan it is critical to the process of raising Capital but on top of that it's an excellent way to manage the development of your company the concept of Milestones is to break down the development of your company let's say for example the next three to five years into phases and the end of each of those phases will be one of your milestones for example if you have a software company

33:48 then you could imagine that the phases could be phase one getting the basics together to start the company during which you would Define how your company will operate in its earliest stage how you will test your market and get the elements you need to determine that it's worth your while to dive into the project the end of that phase is your first milestone Phase 2 would be product development in that phase you will focus on your efforts and those of your team if you have one on the development of a version of the software that is Advanced enough that you can hit the market it doesn't mean that you're not doing all the smaller things that need to happen within your company but the big thing of the moment is getting your software ready

34:37 the end of that phase is your second milestone phase 3 would be sales and marketing plan now that you have the basics together you have a software or an app to sell you should definitely have a strong plan to get people to buy it to get excited about this talk about it and make it financially successful the end of that phase is your third milestone in this example there are three phases and three Milestones the reason why phases and Milestones are so important to raising capital is that it will enable you to raise Capital to fund those phases one by one by splitting the company's development into phases ended by Milestones you actually package

35:23 your company and its development in a way into individual companies that help investors know when he is supposed to exit and sell his shares to potentially another investor who will fund the next phase and therefore the Milestone is the time at which the investor is expecting to sell his or her shares so break down your plan into Milestones so that you can be specific with your investors about what they're funding with their capital how it will change the value of the company and what is the exact time at which they will have the opportunity to exit this investment opportunity

36:10 in this course we will talk a lot about debt and equity and it's important to understand the difference that is simply what you know it is it's borrowing money from an individual or an institution and pay back that amount with interest once the loan is paid back you and the lender can each go your own way and never meet again no strings attached it's a way of course to raise Capital since raising Capital despite the fancy name is just about getting the money you need to be able to do the things you need to be done Equity is quite a different way to raise capital in this case you get money all the same from people or institutions but you're giving in

36:55 exchange a portion of your shares and therefore a portion of the ownership of the company the immediate upside is that there is nothing to pay back not now not later but the flip side is that your new business partner can have a say in the management of the company and get a share of the profits all in all it can be much more costly than alone since you hopefully will make a lot of profits which you will have to share there is no limit to the profits you will be sharing whether it is one dollar or one million dollar or even more the investor will get a percentage of it all the same there are upsides though to this such as getting a business partner or a mentor someone

37:42 who will bring advice and his Network and even potentially customers based on the percentage of the company he owns he will have a smaller or bigger say into the company decisions someone owning only 10 of the company will not have much of a say or any ability to make decisions but if that person has 50 of the company this person can pretty much decide what the company will be doing the only way to part with an investor is if he sells his shares back to you or to another investor another important note is that when you sell shares to investors to get Capital you can Define what those shares entitled the investor to do this is for example important when selling

38:30 shares to someone close to you such as friend or family those are people who might not necessarily bring the advice and mentorship network and customers you would expect from regular investors along with the money they give you you can therefore sell them shares that give no voting rights which means that they can claim a portion of the profits of the company as every other investor but will have no way to make decisions for the company or participate in its strategy other than trying to convince you to do something a great thing with Equity is that you can do a lot of things with it and Define exactly what the investor is entitled to but don't be fooled

39:16 investors know exactly what they should be getting so you need to be just as Savvy on the subject using your own money such as savings to fund your company or project is the first and foremost plain and simple most logical way to start raising Capital you raise your own capital you should like that option because it will first be a great way for you to get a much better return on investment than any other investment out there it's a great way to start your company without sharing any of the control and ownership of the company just yet and for investors it's a way to show that

40:03 you believe in yourself and in your company and that you are not afraid to bet on yourself on the opposite side if you manage to get in front of investors without having invested a single Dollar on your project then those investors will rightfully question why they should invest in your project if even you are not willing to do so or worse that you have not been able to save a few thousand dollars to get it started putting your own money into your company is assigned to everyone that you believe in what you're doing that includes your savings and any money that you can get from your family for example to help you start your business it is in short any money that you can get that you won't have to repay

40:57 in this video we will review two options available to many people which put your personal well-being and the well-being of your relatives in denture but which still are part of the capital landscape and therefore deserve to be described at least for completeness the first one is about maxing out your credit cards to get the capital you need I might not even need to explain the concept here of using your credit card to pay for everything you need to get your company started those loans usually carry very high interest rates and are long and difficult to repay if things don't go as planned and you need more time than expected to sign your first customer or if customers take more time than expected to pay you for

41:47 your services then those loans will put a lot of pressure on you very fast and in addition to worrying about how to sign more customers you're displaying your time between getting your company going and finding ways to pay back your loan you could be putting your credit rating at risk as well with all the consequences that come with it the second one is called a home equity loan this is a loan that you can get if you own your home and have paid back a portion of the loan depending on the value of your home and the amount that's actually left to repay the bank could be inclined to Grant you another loan called a home equity loan if for example your home is currently

42:32 worth one hundred thousand dollars and that you have sixty thousand dollars left to repay then you should be able to get a loan for up to 90 percent of the difference between the two and in this particular example you could get more than thirty thousand dollars to invest in your business the downside of this loan is that if you fail to repay your loan you could lose your home there are many safer ways to raise money which we will be reviewing together in this course so what is crowdfunding crowdfunding as its name States is a way to raise capital for your company through a large number of investors that's very different from the traditional way of raising

43:22 money which is done through a small number of wealthy investors or a venture capital firm individually each investor called in this case a backer will invest a relatively small amount of money but collectively it can represent tens of thousands of dollars or even hundreds of thousands of dollars in this case investors are called backers because they're actually not investors in the case of crowdfunding at the moment of this recording people that want to put money on your project cannot do it as investors for legal reasons and have to make donations instead which are usually rewarded by a gift or a limited edition product

44:10 entrepreneurs and backers meet on funding platforms which are websites dedicated to putting in contact potential backers with entrepreneurs some of the most widely used websites are kickstarter.com and indiegogo.com on those websites you can create a project profile which you will use to Market your company and product with the objective of attracting backers and motivating them into giving you the capital to make your project a reality there have been some huge successes in the field of crowdfunding and one of the most well known is the people e-paper watch this is the story of an entrepreneur who needed to raise 100 000 and ended up getting 10 million dollars from backers on Kickstarter of course that's an

45:02 extreme example of what can happen when you raise Capital using crowdfunding but is also an example that it can be very successful and get you the capital you need and as we will see crowdfunding is best serving very young companies that have a limited connection to the investment world one of the first ways people usually consider to raise money is to turn to their friends and family to lend them the capital they need to start their company it often sounds like a great idea because those people are easily accessible and want to see a happy and successful but the nature of the relationship itself and the fact that

45:48 those people are so close to you is actually what makes it the most dangerous ways to raise money when you raise funds through professional investors everyone knows what the stakes are what the potential upside is and of course the hard reality that 80 percent of all startups fail eventually and that there is a very real risk of losing your entire capital with friends and family it is actually quite different their motivation to invest in your business is actually related to the fact that they want you to succeed or to send you the message that they believe in you and want to support you in your entrepreneurial efforts they might even be reluctant to give you their opinion if it's negative so as not to demotivate you or have you thinking that they're not supporting you

46:36 usually it even goes one step further which is that friends and family can be reluctant to do any paperwork to formalize your agreement when you're in that first phase where everything is still possible everyone is very happy you're getting the money and your friends and family are happy to help you but usually things get complicated further down the road the question is what happens if your company meets difficulties and you're not able to repay the loan is that going to be an issue if your company files for bankruptcy do you expect to repay the loan anyway those are all questions that need to be answered up front when you're dealing with an institution all of

47:22 those things are set in stone as soon as you sign the contract you know who is responsible for the loan what will happen if you miss a payment and the full consequences of not being able to repay the loan with friends and family you need to have the same level of rigor in the borrowing process and Define all those things the benefit of doing so is that if things do turn sour then there is no relationship or family issues added on top since it will all have been defined in advance for example if you are having temporary difficulties you need to Define how you will handle it will you stop the monthly payment for a time until your finances are better is your lender okay with that and does he have the financial stability required to live without that

48:13 money if your company files for bankruptcy will you be repaying the loan or not and if so will it be okay for your lender to wait until you have a new source of income to repay the loan will they accept a smaller monthly payment over a longer period of time and even if you do remember that those people are your friends and family and they might therefore have an opinion on how you use your money for example they could be okay to reduce your monthly burden and take it on themselves to let you repay the loan over a longer period of time but they might also feel bad if they see you going out or on vacation instead of paying them in an accelerated way you of course might feel like this is a well-deserved night out or vacation but chances are they will see

49:02 it in a very different light they might feel like they're financing your vacation those are things you need to take into consideration when borrowing money from friends and family getting the money is usually the easy part but the consequences down the road can be terrible so what's the best way to borrow money from friends and family first you need to treat them like strangers as far as paperwork is concerned don't fall into the Trap of believing that overall Agreements are sufficient just because you know each other then protect their interests better than they will as I said earlier they will not want to protect their own interests so as not to lead you to believe they mistrust you so you have to

49:49 do the job and insist on putting everything on paper go over every possible outcome and then put in writing the way you will manage it it is so important that I will say it again put everything in writing don't rely on your memory or Theirs to know what was originally said and by the way even if we all had good memories we also all have different interpretations of what we say putting things in writing helps a lot in clarifying the agreement even if that document might not have a legal value it will be a great way to preserve your relationships borrowing money from friends and family is a dangerous game if you must do it to get started or if there's no other way to get your company on its way then do it but put it

50:38 all in writing and defend the interests of your friends and family as your own in this video we will be covering two types of investor debt traded and convertible debt trade that is the basic loan that you and I are used to getting for our personal needs the money you borrow is to be repaid over a certain period of time or at the end of the period with a certain level of interest rate that's a great way to get Capital easily and if your company has a certain level of Revenue and is looking for capital in order to launch a new product or start operations in a different state or country for startups this type of loan is usually accessible

51:28 only if you're personally responsible for the loan and repay it even if your company fails otherwise banks are usually reluctant to lend money to startups given the high level of risk Banks tend to prefer safer Investments with a very very low probability of default for startups the best way to get a straight loan is to borrow from friends and family but we've already covered this point previously convertible debt is different from straight debt only in the fact that there is an added element in the contract that states that the lender can either receive his money back with interests or the equivalent amount in shares of your company

52:13 at a certain point in time and very concretely you get the money you pay nothing every month and at the end of the loan period let's say three years or five years you either pay back the total amount due interests included or give shares for a total value equal to the amount due it is normally expected that the lender will convert the debt into shares when the time comes this debt is then actually halfway between a debt and a sale of equity the way it works is that the loan usually runs until you get to the next round of investment or to a significant milestone and at that time the person that lends you the money can get shares for an amount equivalent

53:01 to the money that was given to you plus a discount to compensate the lender for the risk he has taken so for example if you assign a convertible loan for one hundred thousand dollars you could have a seven percent interest rate with that loan so that if the lender needs to get his money back then that will be the terms on which you will pay that back to him if on the contrary the debt is converted into Equity then he will be getting shares of your company worth one hundred thousand dollars plus the discount that was negotiated at the beginning in this example let's say 15 you have to remember though that for a convertible debt to work you have to be able to get to another

53:51 round of funding or to the major Milestone you agreed upon if your company does not meet that Milestone then technically the lender could ask you to pay back the loan and force you into bankruptcy if you're not able to pay back so why would you be interested in using convertible debt first because it's much simpler to get than regular investment money for regular rounds of funding you need to value your company in order to Define how many shares investors will get for their money in the case of convertible debt this discussion is postponed to a later time when you know better the second reason which is tied to the first one is that because you will postpone

54:38 the valuation discussion you will usually strike a better deal and give away less shares when you are starting your company it is super hard to determine the value of your company and when you give shares in exchange for money so early on you're never sure if you're getting a great deal at that time you will always feel like you're getting a great deal because you so much need that money to get started but down the road when you see how your company was successful and you'll have all the elements needed to value your company correctly then you'll have the final answer as to if it was a good deal or not for example your company could be way more successful than you anticipated and in that case great chances are that

55:26 you'll have given away more shares than you should have so convertible debt gets you the money all the same but you get to Value your company when you know better which is great the small business administration is a government entity whose purpose is to help small businesses to grow and thrive one of their activities is to help small businesses get loans people usually refer to it as SBA Loans but that's not exactly how it works the SBA does not lend money per se to small businesses it rather provides guarantees to financial institutions so as to reduce their risk and facilitate small businesses access to loans the way it works is that if your company

56:18 is eligible the SBA will take responsibility for a large portion of your loan and if your company cannot pay it anymore the SBA will pay back the amount on which he took responsibility in some cases its responsibility can go up to 80 percent of the loan which is very high that means that when a bank evaluates a loan for a company that is eligible for SBA backed loans then the risk the bank is taking is really on only 20 of the total amount in concrete terms if you borrow one hundred thousand dollars from a bank and the SBA guarantees 80 percent of it that means the bank will be able to get back up to eighty thousand

57:05 dollars from the SBA if you default and its risk is therefore on only twenty thousand dollars out of the total loan in essence for the bank then it is as if they were considering giving you a much smaller loan and it becomes therefore much easier for your company to get it of course since the SBA is a governmental entity and is putting taxpayer money at risk it is requiring a lot of information before it decides to back alone it can therefore be administratively intensive for an entrepreneur some of the requirements to be eligible are to be working for profit to have looked for other sources of money before turning to the SBA including using your own personal money for at

57:55 least 10 percent of the amount you are requesting to present a business plan and financial projection in order to articulate why you need the capital to have no debt obligation towards the US government and for them to be able to take back the equipment you bought with the loan if necessary to recover as much money as possible if you default there are other requirements and you can find all the details on the SBA website at sba.gov those I think are all very valid requirements necessary to ensure that the taxpayer money is well managed the second area the SBA is active on in relation with our topic here is the sbic or the small business investment corporations

58:45 the sbics are private organizations that are regulated by the SBA they invest in businesses and usually focus on Specialized areas for example on companies that have a socially or economically disadvantaged ownership to know more about SBA Loans the best next step is to go to the sba.gov website which is very well designed you will find information on things like the 7A programs or the 504 programs and the sbic programs those are the programs we have just described and since they change regularly that's the best way to get fresh information

59:31 investors also called business angels are very wealthy individuals who invest their own money into startup companies usually at their earliest stage they are accredited investors but most of them are not professional investors there are successful entrepreneurs people who held high management positions in leading firms and sometimes just wealthy people Angela investors invest in startups for many reasons it can be as a hobby a way to stay active after having retired but also a willingness to promote entrepreneurship by helping entrepreneurs in other cases they invest because they believe in the project and want to be part of the potential Next Big Thing

1:00:19 they all have at least one thing in common they invest their money to get a significant return on investment they invest in companies in their infancy when it's not clear yet that the company will be successful in its market and sometimes even before it has earned its first dollar many angels specialize in certain Fields or Market based on their own experience one of the big difficulties when you invest in startups which we will see is also shared by Venture capitalists is that you invest in companies that are supposed to have a game changing product and to be able to understand the potential of that product you have to have some experience in that market so it's only logical that investors focus on fields they know so that they can have

1:01:10 a solid opinion on the potential for success of the companies they invest in now let's talk about the types of Investments Angela investors get into usually they tend to invest individually between twenty five thousand dollars to two hundred thousand dollars per deal which is usually insufficient in itself Angel Investors therefore group around the deal to invest together amounts that range between one hundred thousand dollars to one million dollars and on average they invest as a group around half a million dollars per dealer Angel Investors are the stepping stone between the funding you get through your own means plus debt and venture capital companies that approach Angela investors usually have a

1:02:01 specific project they need to deliver such as developing a product to the point that it can hit the market or put in place the structure the company needs to generate large scales of Revenue it's those kind of big Milestones that angel investors are looking to fund so that upon their completion the company can have its next round of funding potentially with venture capital foreign venture capital I would like to set the scene of how Venture Capital works from a high level standpoint I think it's important to understand who the key stakeholders are and what Venture capitalists also called VCS actually do outside of investing Capital into startups a venture capital

1:02:53 firm usually operates on a 10-year cycle during which it will go through five steps each fund has a limited lifespan and successful VCS raise and run a number of funds over the years the first step will be for them to raise Capital just as you will be doing but lots more of it with an average font size of 150 million dollars then VCS will start reviewing and investing in deals such as potentially yours the next step is to make sure things go as planned by participating to the management of the companies they invested in usually as being members of the board

1:03:40 then comes the time to harvest the return of their Investments by exiting the companies they invested in through the sale of their shares and the last step is to return the funds with the expected return on investment to the original investors the ones that provided the original 150 million dollars let's look now at each step in more detail the first step is when VCS themselves raise Capital to constitute the fund they will be managing during the following 10 years the boss of the VC firm is also called the general partner he is the leader of the firm and will be working with his team to raise Capital exactly the same way you will be doing it

1:04:29 the big difference though is that his job is much more difficult since he's not raising money on a specific project but rather on his ability and the ability of his team to identify invest in and cash out from business deals that should prove in the future very rewarding but have not been identified yet as you're probably guessing one of the key factors is going to be the past experience and achievements of the general partner and his team which will make that process possible the general partner and his team will be raising capital from what is called limited partners limited partners are usually either very wealthy individuals corporations or Pension funds and all

1:05:21 of them are looking to make a very big return on investment by investing in the very Risky Business of venture capital they are called limited partners because the loss that can incur if all fails is limited to the amount of money they have put into the fund not more you might rightly say that this is already a huge potential loss but still it's not the same as being responsible for the money and potential liabilities that could arise from the operations of the company you invested in the fund is constituted on the basis of a number of potential limitations that are contractually agreed with the limited partners such as the field or industry in

1:06:09 which the money will be invested the development phase of the projects or companies investing in for example in early stage companies or at different maturity levels the time frame that the VC firm has to run its operations for example it could be set to a total of 10 years which would require the VC firm to return the capital and the return on investment to the limited partners at the end of a 10-year period whatever the outcome is so the first year of the life of the firm is dedicated to securing the capital The Firm will be managing for them this tells you as well that

1:06:54 VC firms are targeting specific businesses and you should therefore make sure that you get in contact with those firms that are interested in companies that have the same profile as yours once you have identified those VC firms you can start the process of getting in contact with them so what exactly is bootstrapping bootstrapping is about starting and running your business through your own means without the help of outside investors it's not about running a business with no money there's always a need for some money but there are ways to reduce big time the money you need to start your business

1:07:43 not by not spending where you should be spending but rather by using proven techniques to evaluate what you actually need to spend your money on that means learning new ways of working to make sure your money is well spent as you'll see in this course being cost conscious is only but part of the solution there are business development techniques that can have a real positive influence on the finances of your business they will have you doing what you originally planned but in different ways and at the same time cut significantly the Investments you need bootstrapping is not only about avoiding spending money it's also about taking actions that cancel the need for some spending there are many kinds of bootstrappers from the hardcore one to the one

1:08:33 that will use bootstrapping techniques to optimize his business and run his company more efficiently you'll have to Define by yourself what kind of bootstrapper you want to be or need to be since a bootstrapper does not plan on using money from outside investors it will largely depend on the money you have versus the money your company needs being a bootstrapper is not about doing it on your own with no outside help to prove the world something it's about using techniques that make possible a venture that would not have been possible otherwise by the way most boost Trappers use those techniques to start our company and get to the size they need to attract investors so the two are not incompatible it's just different phases of the development of a company and using

1:09:22 bootstrapping techniques during the entire life of the company is a good business practice anyway there are five concrete things that an entrepreneur should focus on when bootstrapping a business four of those pillars are focused on reducing as much as possible the financial burden of starting a company and operating it during its infancy the last one is about the impact that bootstrapping can have on the life of an entrepreneur but more importantly on how to manage it the first pillar will be looking at is managing spending we will be looking at the most significant costs of starting a business and how to keep them under control

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