Monday, February 19, 2007

Investment Models for Startups!

Folks,


I recently posted a question on Linkedin.com enquiring about different venture capital investment models and best among them for a startup business!

Here are some great replies:
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Robert Berman wrote:

There are variations

- capital injection of the total amount you are looking for.
- capital injection of part of the amount you are looking for with a commitment that when you reach certain goals more funds will be advanced.
- convertable debt
- a loan that can be converted into common shares of the company at a pre-defined value. - capital is usually placed in common shares, but in certain cases all or a portion can be in preferred shares.
- the investor will usually request a number of board seats.

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Muskie Mckay wrote:

VC money can be expensive, especially in the Web 2.0 group of companies some are trying to resist the VC money and operate lean, boot strap their operations, work out of cafes etc. How much money you need is also a factor.

If your capital requirements at least initially are not extreme you should try the 3 F's (friends, family, and fools), after that Angel Investors. These are single individuals or a small group who invest part time. They often ask for less, especially in terms of control than a VC would, put have less capital to invest.

A niche or boutique VC might be the best fit for a specialized company, they can act as a lead investor and form a syndicate if your capital requirements grow beyond what they are comfortable investing in a single firm.

Syndicates and subsequent rounds of funding are common, they spread the risk among several investors, often strategic partners can be brought in by a VC.

Your capital may be structured so that you get 25% immediately, another 25% at milestone one such as a working prototype, 25% more at first customer, 25% more when revenues reach a pre-arranged amount. By tying additional funds to specific milestones it keeps the company focused and further reduces the risk to the VC.

If the entrepreneur can never get a working prototype or find even a single customer, the VC is saved some of their investment.

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Barrie Harrop wrote:

forget VC's in your plans,they are after young blood,dont be another victim or vwaste your precious time,business angels are your best shot at your level,even put you asset up as security if you believe its non-risk -personally i wouldnt,the angels are punters,just google for your local.


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Alok Jain wrote:

Muthu, Here is what I think yu are looking for:

1. Angel Investment - this is essentially where high net worth individuals /people with extra cash invest in startup. These are typically people wiht good business experience and connections. This is typically good for early stage (see stage)

2. Venture caps - they typically invest after the concept is proven and more than money bring experience and connections... they typiclaly expect great return on invements in less than 5 years timeframe.

Generally it is best to start on your own, prove things a bit and then go for venture cap when youa re ready to expand and need substantial money for it.. you know my email, I would be happy to share more specifics to the degree I can.

All the very best, this is a very good time for sucha venture.


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Wow - those are some great views on Investment models. It not only gave me a clear picture about good & bad things about investments but a good kickstart to plan for investments in future.

Share your thoughts here!

Cheers


MuthuKumar.R
User Experience Lead - Web 2.0 enthusiast - Strategic Thinker

1 comment:

Alok Jain said...

Depending on what you want to do, this might be of some interest:

http://www.ycombinator.com/s2007.html