Startup funding for beginners
Hitting up your mum for startup capital can be risky business
Thursday, April 29 2010 || Investment || BY Kim Triegaardt
Phil Holliday, chair of venture development group Powerhouse and angel investor to several startups — including healthcare capacity planning software company Emendo — says it is lack of financial planning where businesses become unstuck.
“Most people think in the early stages about tactics, but strategy of growth is rarely there. They have a business plan that tells them how their business is going to grow but they can’t tell you how they are going to fund it. There needs to be a continuum flow of funding across all the stages. How are you going to get startup funding? How will you attract angel funding and then venture capital?”
For a new business with no financial history, there are limited ways of raising money. The first round of funding for startups usually comes from the group known affectionately as the Three F’s — family, friends and fools.
But while Holliday swears blind his mum would never sue him over money, horror stories abound about the perils of getting involved with family and friends in business. So how do you stop a handshake loan from becoming a headache?
Founder of the Orbis ring flash now used by photographers around the world James Madelin says money is best spent on getting a good lawyer and
legal advice.
“The decisions you make at the start of your business will have implications on your company for years. It’s worth stopping to consider what you are doing so the investment process and share agreements are ones that you will be happy with years down the line.”
Holliday says family and friends can typically invest up to $100,000 in a startup business, and while there is no ‘one size fits all’ arrangement, his preference is for the initial investment to be made as a loan as opposed to shares.
“It’s too difficult to put a value on what a company is worth so don’t get hung up on a valuation. I’d advise against putting in money for shares as it’s really difficult to expect to get a return at this early stage. Also, why would you want to give away the equity in your company?”
Madelin agrees deciding on a share value is a very arbitrary process. “When we launched Enlight Photo in 2006, we stuck our finger in the air and said we expect to make $X in the first year. We decided on a risk factor and then divided that by three or four to achieve a realistic valuation figure. No one questioned it.”
He chose not to go the route of a loan, citing high legal costs to set up the loan agreements and a lack of awareness that it was an alternative he could have considered.
Loans, however, can always be structured to be converted into equity in subsequent funding rounds. When it comes to setting an interest rate, Holliday says as an angel his loans come with a 10% interest tag and he would like a 60% return, “but of course we very rarely get it!” Instead he has the chance to participate in a growing business at a very exciting stage of its development.
contact me at drfaisal@el-azizinvestments.com
Posted by Dr. Aziz Faisal at 07:56 on July 5, 2010
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Posted by paulo muller at 08:53 on June 14, 2010
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