Entrepreneurship
Glossary
SECTION 6
FUNDING / SUPPORT / FINANCE
There are various sources of funding for start ups. The “best source” of funding will depend on your motivations for the business, the stage the idea or business is at and how much funding you need.
Questions to expect when you’re talking to investors:
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How are you going to make money? How is your business financially sustainable?
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What traction do you have?
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How much funding do you need right now? and what for?
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What is your gross profit and what is your bottom line? - this applies when you already have sales
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What is your break even point?
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If you don’t yet have sales, you can use assumptions of predicted costs (fixed and variable) and expected sales to calculate the break event point.
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What is your burn rate?
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What is your cash flow forecast?
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What is your exit strategy?
BOOTSTRAPPING
02
The process of starting up a self-sustaining business without external investment, e.g. by relying on personal finances, or the revenue from early sales. The word originates in the phrase "to pull oneself up by the bootstraps" i.e. to succeed without outside input. Not all businesses can be bootstrapped.
CONVERTIBLE LOAN
03
A convertible loan is a loan which will either be repaid or, in most cases, converted into equity at a future date. These loans represent a form of financing which ordinarily takes less time (so gives quicker access to cash) than an equity funding round. Just like all funding routes, there are advantages and disadvantages to convertible loans.
CROWDFUNDING
04
Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the Internet. Crowdfunding typically can be grouped into
Rewards crowdfunding: Entrepreneurs pre-sell a product or service to launch a business concept without incurring debt or sacrificing equity/shares. A well-known example of a rewards crowdfunding platform is Kickstarter
Equity crowdfunding where investors contribute with capital and receive back a share in the company.
EQUITY FINANCE
05
Equity finance is generally the issue of new shares in exchange for a cash investment. Your business receives the money it needs and the investor will own a share in your company. This means the investor will benefit from the success of your business. Typically, angel and venture capital investors will take the equity finance route, i.e. investing money in your company in exchange for a share of the ownership.
PRE-SEED
06
The earliest stage of funding a new company comes so early in the process that it is not generally included among the rounds of funding at all. Known as "pre-seed" funding, this stage typically refers to the period in which a company's founders are first getting their operations off the ground.
Pre-seed capital frequently comes in the form of convertible security. It begins as a loan, and when certain growth conditions are met, the loan turns into a certain amount of equity. Some Universities also have pre-seed funds to support the early stages.
SEED INVESTMENT
07
Seed funding is the official equity funding stage. There are many potential investors in a seed funding situation which can include founders, friends, family, incubators, angel investors, venture capital companies.
Amounts can be anywhere from $10,000 up to $2 million based on proof of concept/prototype, hiring strategy and so on.
ANGEL INVESTOR
08
High net worth individuals who are willing to risk their own money to invest in a start-up or entrepreneur, in exchange for ownership in the company.
Angel investors can bring lots of expertise and contacts, so it is worthwhile doing your research on their particular interests. Angels sometimes group in syndicates and co-invest in companies.
VENTURE CAPITAL (VC)
09
Venture capital refers to the capital investment that a private investor (professional companies, funds) provides to companies with high growth potential in exchange for a part of the company.
There are plenty of VCs , so make sure you do your research to identify their interests, sectors and geography they invest in. They focus on their return on investment, so expect you to have an exit plan.
When you hear discussions of Series A, Series B and Series C funding rounds (increasing in value of funding amount), these terms are referring to this process of growing a business through outside investment from VCs.
SERIES A,B,C INVESTMENT
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Refers to the process of growing a business through outside investment from VCs.
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Series A ~ typically between $2 million to $15 million - typically used for revenue growth, development, operations, branding, marketing
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Series B ~ typically between 15 - $26 million - typically used for growth, hiring, market expansion, buying businesses
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Series C~ typically average $50M - typically used for large scale expansion, acquiring businesses, international markets
DILUTION
11
Raising equity funds (investment) to enable the expansion of your business will dilute your ownership of the business. Dilution occurs every time your business increases the number of shares on offer to investors. It reflects the diminishing value of existing shares as a proportion of an increasing total number of shares. The conditions for dilutions get negotiated during venture capital deals - we recommend you take expert advice before entering into negotiations.
EXIT STRATEGY
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An exit strategy is a plan for how you will eventually leave the business. This may not feel obvious when you’re just getting started, but planning ahead is an important part of building a business and that includes your future plans.
Some things to consider:
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the length of time you plan on being part of the business
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your personal and business goals
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any investors or creditors who may need to be compensated
Investors will want to know what your exit strategy is. There is a good overview here:
https://www.airswift.com/blog/exit-strategy
DUE DILIGENCE
13
Due diligence describes a detailed and thorough investigation of a business' operations, finances and capabilities. It is typically undertaken ahead of major deals between companies. The aim of a due diligence report is to identify problems or liabilities which could affect the deal.
TERM SHEET
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A Term Sheet is a nonbinding agreement summarising the key deal terms of the funding round. It’s one of the main negotiating tools between founders and investors. The Term Sheet serves as a summary of the more detailed investment agreements (the Shareholders Agreement and Articles of Association) in the funding round. Although it’s not legally binding, all investors will typically agree and sign the Term Sheet first, before the remaining agreements are generated.
RUNWAY
15
Runway refers to the amount of time a company has before it runs out of cash. It is used in the question “what is your runway?” which is frequently asked by investors. If your net burn rate or monthly outgoings are £10,000 a month and you have £100,000 in the bank, you've got 10 months of runway to start generating positive cash flow or secure further funding or you’ll have to close down the business.