ShmoopTube

Where Monty Python meets your 10th grade teacher.

Search Thousands of Shmoop Videos

Finance: How Do You Get Your Startup Funded? 96 Views

Share It!

Description:

How do you get a startup funded? Depends if we're talking about a tech startup, or a non-tech startup. If you've got a promising, budding tech company, you'll find it's much easier to raise capital. But if you're looking to get a restaurant off the ground... your chances of finding funding are about as good as literally getting a restaurant off the ground. So... good luck with that. You'll do an A round in your first funding, a B round next, and so on. Venture capitalists are the ones writing the checks. Investment bankers are the ones taking you public in your IPO.

Language:

English Language

Subjects:

Transcript

00:00
Finance a la Shmoop. How do you get your startup funded? If you're leaning is in
00:08
this direction, well then first you pray. Can't hurt right? Okay well maybe it can,[two men in church]
00:13
shocking. Well the world of startups is really a tale of two cities or types of
00:18
business. There's tech startups and then there are
00:21
non tech startups. The former is lavishly funded with tremendous resources and

00:27
huge valuations. Which means that the capital invested is almost free for the
00:31
founders and there are literally thousands of companies around the world
00:35
who invest in early technology startups.[Global map with business buildings] But if you're trying to fund a
00:39
restaurant, a bar, flower-arranging chain, a bug spraying service and auto service
00:45
business. Well then you're probably badly out of luck. If you do get financing,
00:50
it'll be on vastly worse terms than if you would have invented a new robot operating
00:55
system that could see in the dark, or an electronic zit zapper, or a drug that
00:59
made you happy you knew it and you didn't even have to clap your hands. [T-Rex clapping hands]
01:03
Since the restaurant industry for example is such a bad investment with
01:08
some 95% plus of them going bankrupt in the first few years.
01:12
Very few investors are willing to take any risk investing in them. As a result
01:17
if you want to fund that kind of business, well you most likely have to
01:21
fund it yourself by saving your pennies, waiting for old uncle Larry to kick the
01:25
bucket and leave you money and/or mortgage whatever you can of your house [man at Chase Bank]
01:29
at the bank. Knowing that if your restaurant goes belly-up, you rethink
01:33
your five-year-old SUV in terms of living room, kitchen here and bathroom
01:39
there. Well if you do have the knack for tech, well and you come up with the lawn
01:43
Roomba which will make mowing the lawn a breeze. Then the process usually begins
01:47
with a business plan. You'll leverage Google slides, a free presentation tool,
01:51
where you can have one page describing your product, a page covering the size of[business slides]
01:55
the market, ie the number of potential buyers, anyone with a backyard basically,
01:59
along with the price you'd expect them to pay. Another page covering the costs
02:03
of making the first one, the first hundred, the first thousand, the first
02:07
hundred thousand units. Were presumably the marginal cost per unit
02:11
down with scale production and finally you have a page or three showing, what it
02:15
is you've done that's hard to do. IE you have patents protecting your idea, [board meeting presentation]
02:20
which you've already filed and it's not some idea that people at Google, with its
02:25
engineer army could likely read your slides as you build them and just copy
02:30
what you've done and do it themselves. Well you figure out how much money you
02:34
need to get a couple of years down the road. This point where you're pushing
02:37
product out the door and well say you asked for three million dollars from[cost pie chart]
02:41
investors who would then own maybe a third or more of the company day one.
02:44
You're valuing then your idea, your time, your brain, your patents, all combined for
02:49
I'll say six million dollars already then you're asking investors to pile
02:53
three million dollars in cash on top of that six million. So that the combined
02:57
company of your ideas and you, are now worth a total of nine million bucks.
03:03
You'll also want to make talented hires to whom you can't afford to only pay[business woman shaking hands]
03:07
cash. So you'll allocate a bunch of shares or
03:10
options on shares to be granted to those new highly talented employees as well.
03:15
Maybe those options or shares are worth another million boxes, as you add everything
03:18
up. Such that your total company now has a notional combined value with
03:23
everything of ten million bucks and that's when the Trojan hit the road [man driving red car]
03:28
and you see if you actually can build this thing. Mow little Roomba mow.
Full Transcript