Investments, or money invested into a new enterprise before a concrete value can be assessed, usually come in exchange for ownership equity or convertible debt.
- Investment Sources -
- Bootstrapping (self) – using existing capital from an existing enterprise to fund a new one
- Crowd Funding (others): A new approach used by sites like Kickstarter, which permits an entrepreneur to solicit money from a community without any promise of direct material return; usually done as a pledge, as opposed to in exchange for company equity.
- Angel Investor (person) – an affluent individual who invests from their own funds. While their investments tend to be less than that of Venture Capital firms, in recent years Super Angels have been defying this norm.
- Venture Capital (group) – funds which come from an exterior
- Seed Money($50-500K in exchange for %20-%40 stake in company): This is normally funded by angel investors, and provides capital to do market research and do product development on your idea. Obtaining this investment is centered around showing ‘potential’ – market potential, team potential, and product potential.
- First-Round (Series A): With a beta developed, this round is normally raised as capital to help build early sales and cover manufacturing costs.
- Second-Round(Working Capital): Usually given for companies selling a product, but not turning a product.
- Third-Round(Mezzanine Capital): Expansion Money for a newly profitable company
- Fourth-Roun(Bridge Financing): intended to finance the ‘going public’ process
|Stage at which investment made||Risk of loss||Causation of major risk by stage of development|
|The Start-up Stage||53.0%||75.8%|
|The Second Stage||33.7%||53.0%|
|The Third Stage||20.1%||37.0%|
|The Bridge/Pre-public Stage||20.9%||33.0%|
A Table of risk for VC per round investment, suggesting facility of obtaining funding for each round
In judging the value of a startup, quantifiable metrics such as revenue and stock share don’t apply, so VCs use a different set of vocabulary to critic
- Common Startup Problems -
- Chicken and Egg: This refers to the problem in which a services value is related to the number of users currently using it – the problem here is success is possible only after achieving Critical Mass wherein there is enough momentum for the service that it becomes self-sustaining. Achieving critical mass is sometimes referred to as having “escape velocity”
- Bridge Technology: coined by Fred Wilson, the term refers to a service which makes use of the difficulties involved during a transition between technologies (i.e: web browser to mobile browser, Flash to HTML 5). He views these types of services as temporary.
- Startup Metrics -
- Viral Coefficient: The number of new customers brought in by each customer. Example: A Viral Coefficient of 1 means that each customer brings 1 new customer. More here.
- Customer Lifetime value: The amount of profit gained per customer. The formula takes into account Churn Rate, or rate of customer loss, Discount rate, Contribution Margin, retention cost, and the period of time used for analysis. Calculation varies by method, and depends on accuracy of forecasted metrics. See Dave McClure’s explansion here, or a pretty video.