FUNDRAISING
| FUNDING | VENTURE CAPITAL
Fundraising
is the process of soliciting and gathering money or other gifts in-kind, by
requesting donations from individuals, businesses, charitable foundations, or
governmental agencies. Although fundraising typically refers to efforts to gather
funds for non-profit organizations, it is sometimes used to refer to the identification
and solicitation of investors or other sources of capital for-profit enterprises.Funding
or financing is to provide capital (funds), which means money for a project,
a person, a business or any other private or public institutions.Those funds
can be allocated for either short term or long term purposes.
Seed
Money
A seed round, sometimes known as a friends and family round, is a securities
offering whereby one or more parties that have some connection to a new enterprise
invest the funds necessary to start the business. Seed money refers to the money
so invested.Seed money is typically used to pay for such preliminary operations
as market research and product development. Investors are often the business
founders themselves, using savings, mortgage money, or funds borrowed from family
and friends. They may also be outside angel investors, venture capitalists or
accredited investors who are acquainted in some way with the founders. Seed
capital is not necessarily a large amount of money. Many people start up new
business ventures with $10,000 or less.Seed money can be distinguished from
venture capital in that venture capital investment tends to involve significantly
more money, an arm's length transaction, and much greater complexity in the
contracts and corporate structure that accompany the investment.Seed money may
come from financial bootstrapping rather than an offering. Bootstrapping in
this context means making use of the cash flow of an existing enterprise.
Bootstrapping
Financial bootstrapping is a term used to cover different methods for avoiding
using the financial resources of external investors. Bootstrapping can be defined
as “a collection of methods used to minimize the amount of outside debt and
equity financing needed from banks and investors” (Ebben and Johnsen, 2006:853).
The use of private credit cards is the most known form of bootstrapping, but
a wide variety of methods are available for entrepreneurs. While bootstrapping
involves a risk for the founders, the absence of any other stakeholder gives
the founders more freedom to develop the company. Many successful companies
including Dell Computers were founded this way.
Equity Investment
Equity investment generally refers to the buying and holding of shares of stock
on a stock market by individuals and funds in anticipation of income from dividends
and capital gain as the value of the stock rises. It also sometimes refers to
the acquisition of equity (ownership) participation in a private (unlisted)
company or a startup (a company being created or newly created). When the investment
is in infant companies, it is referred to as venture capital investing and is
generally understood to be higher risk than investment in listed going-concern
situations.
Angel
Investor
An angel investor or angel (known as a business angel in Europe), is an affluent
individual who provides capital for a business start-up, usually in exchange
for convertible debt or ownership equity. A small but increasing number of angel
investors organize themselves into angel networks or angel groups to share research
and pool their investment capital.Angels typically invest their own funds, unlike
venture capitalists, who manage the pooled money of others in a professionally-managed
fund. Although typically reflecting the investment judgment of an individual,
the actual entity that provides the funding may be a trust, business, limited
liability company, investment fund, etc.Angel capital fills the gap in start-up
financing between "friends and family" (sometimes humorously called
"friends, family, and fools") who provide seed funding, and venture
capital. Although it is usually difficult to raise more than a few hundred thousand
dollars from friends and family, most traditional venture capital funds are
usually not able to consider investments under US$1–2 million. Thus, angel investment
is a common second round of financing for high-growth start-ups, and accounts
in total for almost as much money invested annually as all venture capital funds
combined, but into more than ten times as many companies (US$25.6 billion vs.
$26.1 billion in the US in 2006, into 51,000 companies vs. 3,522 companies[1],
[2]). Of the 51,000 US companies that received angel funding in 2006, the average
raise was about US$500,000. Healthcare services, and medical devices and equipment
accounted for the largest share of angel investments, with 21 percent of total
angel investments in 2006, followed by software (18 percent) and biotech (18
percent). The remaining investments were approximately equally weighted across
high-tech sectors.
Angel
Investor Compensation
Angel investments bear extremely high risk, and thus require a very high return
on investment. Because a large percentage of angel investments are lost completely
when early stage companies fail, professional angel investors seek investments
that have the potential to return at least 10 or more times their original investment
within 5 years, through a defined exit strategy, such as plans for an initial
public offering or an acquisition. Current 'best practices' suggest that angels
might do better setting their sights even higher, looking for companies that
will have at least the potential to provide a 20x-30x return over a five- to
seven-year holding period. After taking into account the need to cover failed
investments and the multi-year holding time for even the successful ones, however,
the actual effective internal rate of return for a typical successful portfolio
of angel investments might, in reality, be as 'low' as 20-30%. While the investor's
need for high rates of return on any given investment can thus make angel financing
an expensive source of funds, cheaper sources of capital, such as bank financing,
are usually not available for most early-stage ventures, which may be too small
or young to qualify for traditional loans.
Venture
Capital (VC)
Venture capital is a type of private equity capital typically provided by professional,
outside investors to new, growth businesses. Generally made as cash in exchange
for shares in the invested company, venture capital investments are usually
high risk, but offer the potential for above-average returns. A venture capitalist
(VC) is a person who makes such investments. A venture capital fund is a pooled
investment vehicle (often a limited partnership) that primarily invests the
financial capital of third-party investors in enterprises that are too risky
for the standard capital markets or bank loans. Venture capital can also include
managerial and technical expertise. Most venture capital comes from a group
of wealthy investors, investment banks and other financial institutions that
pool such investments or partnerships. This form of raising capital is popular
among new companies, or ventures, with limited operating history, who cannot
raise funds through a debt issue. The downside for entrepreneurs is that venture
capitalists usually get a say in company decisions, in addition to a portion
of the equity.
Venture Capitalist Compensation
In a typical venture capital fund, the general partners receive an annual management
fee equal to 2% of the committed capital to the fund and 20% of the net profits
(also known as "carried interest") of the fund; a so-called "two
and 20" arrangement, comparable to the compensation arrangements for many
hedge funds. Strong Limited Partner interest in top-tier venture firms has led
to a general trend toward terms more favorable to the venture partnership, and
many groups now have carried interest of 25-30% on their funds. Because a fund
may run out of capital prior to the end of its life, larger VCs usually have
several overlapping funds at the same time; this lets the larger firm keep specialists
in all stages of the development of firms almost constantly engaged. Smaller
firms tend to thrive or fail with their initial industry contacts; by the time
the fund cashes out, an entirely-new generation of technologies and people is
ascending, whom the general partners may not know well, and so it is prudent
to reassess and shift industries or personnel rather than attempt to simply
invest more in the industry or people the partners already know. Source : Wikipedia