30 Jan 2023
19 Aug 2020
It takes a lot of capital to run a business venture. Capital refers to the amount of money a business has available to spend on various needs to expand and grow the company. Even if you have a solid business plan, the reality is that without sufficient funding, you cannot afford new research, expand into new areas, improve marketing and generally be open to new possibilities, all of which are crucial at the beginning stages. While the easiest way to get start-up, funding is by using your own savings, not everyone has a handsome fortune to finance their start-up business ventures. Don’t worry, because here is your guide on how you can collect capital for your new business venture.
You should first approach your family and friends. Asking for funds from family and friends is often easier than other kinds of financing. It takes little time, and the process is not as complicated.
You can borrow a small amount of money from each of your family members and friends. They may be willing to lend you money interest-free – but if this is not the case, you may need an investment agreement that sets out the interest or other forms of reward for the loan.
However, friends and family funding still have its disadvantages. If your business venture fails, you risk both your savings and your loved ones’ money. This may pose an adverse effect on your personal relationships. This places immense pressure on you to do well in your business so you can return the investment of your friends and family.
An angel investor, or a seed investor, is an individual who invests in start-ups. Angel investors usually ask for ownership equity in the business in return for their investment. The investment type may vary, ranging from one-off capital injections to continuous financial support.
The best way to be introduced to an angel investor is through the referral of friends who are investees of the angel investor. In this way, the angel investors are likely to have more confidence in investing in you.
Angel investors can also be found through networking.
Attending social events is a way to approach high-net-worth individuals who may be interested in your business idea. You can join business organisations or attend trade events to expand your social circle.
In addition, there are online platforms where you can submit your proposal to potential investors. Here are some websites we suggest for finding angel investors:
You can first send an email introducing your business venture to the angel investor. The content can include your referral, company introduction, your previous experience, and your pitch deck. Angel investors are normally interested in hearing your business plan, the market opportunity and the working model.
There are also a variety of questions that the angel investor may ask in the following stage which you should be prepared for. Below are some examples:
What motivates the founders to start the business venture?
What kind of experience does the team have?
What are your financial projections?
How much capital do you need to finance your business venture?
What are the key costs?
What is the company’s marketing strategy?
How does the company differentiate from its competitors?
Here are some business introduction letters to angel investors you can use:
Angel investors often invest through a convertible note, which is short-term debt that converts into shares. The investor offers the loan in exchange for shares of preferred stock instead of the loan money with interest.
Investing through a convertible note is fast, simple and saves cost. Another advantage is that you can avoid giving the investors control rights as convertible notes normally do not grant the noteholders such rights.
Some of the key terms in the convertible note are:
Whether the convertible note is unsecured or secured on the company’s assets
Interest rate and payment
Conversion valuation cap, setting the maximum valuation of the company to which the note can be converted into
Venture capital firms fund start-ups with long-term growth potential. You must give up some ownership in your business to the venture capital firm in exchange for the funds. The funds come from individual investors, investment banks and financial institutions.
It is advantageous for start-ups to obtain funding from venture capital firms because other forms of support, for instance, technical and strategic assistance, may be available as well.
Private equity and venture capital both collect funds from investors and use the capital to invest in business ventures. Their goal is to increase the value of the business they invest in and then sell their ownership to make a profit.
The main difference between venture capital and private equity is the type of companies they invest in.
Venture capital firms invest in young companies. They are generally the early investors, participating in Series A and B funding. Private equity firms invest at a later stage, funding Series C and pre-IPO companies.
Here are some top venture capital firms:
Here are some top private equity firms:
Here are some investment agreement templates:
Firstly, it is important to research the venture capital firm. Firms usually have a set of criteria they use to determine which business to invest in. Such criteria include the business stage, geography, investment amount, industry, etc.
For example, some firms may only invest in specific industries such as:
In general, venture capital firms are only attracted to start-ups that are in industries that promote innovation and long-term development. Much existing venture capital investment goes to products in demand, for instance, mobile applications. Therefore, you must ensure that your business venture fits the standards of venture capital firms.
If you find that your start-up fits the criteria of the venture capital firm after conducting research, you will need to prepare a pitch deck to present your business to the firm. The pitch deck is a presentation used to showcase your proposal to the firm.
Some commonly included content is the mission, team, solution to a problem, market analysis, product/ services, customers, technology, business model, marketing strategy and financials. The firm must be convinced that your idea has great growth potential and that it has already received a certain degree of recognition.
Here is a Guide on How to Pitch to Potential Investors.
Below are also some useful documents to help you start preparing for your pitch:
After the initial pitching, there is still a long process that needs to be undertaken before you can obtain the venture capital. The following are some of the issues that need to be negotiated and handled before the firm officially launches its investment in your business.
The venture capital firm will perform due diligence on your start-up. This process is done to screen out business proposals and conduct a detailed evaluation of the business before moving on to the next stage.
Due diligence is a process that involves getting the company’s answers to questions. The questions may be related to the management, market, product/ service, and business model of the start-up. The due diligence process can vary based on the firm’s strategy, market, location, and time.
The firm will review your financial statements, contracts, corporate records, intellectual property, liability, government documents, client information, etc.
A valuation of the start-up will also be conducted by the venture capital firm. This is a pre-money valuation, which refers to the agreed value of the company before the firm provides a new investment.
The method of valuation is flexible and depends on the firm. With a lower valuation, the venture capital firm can obtain a larger stake in the start-up after investment. This creates more potential for the investment and reduces the risk, so the firm will more likely proceed with the investment.
Examples of factors in determining the valuation include the market opportunity, initial traction by the start-up, business progress, competitors’ valuation, and the economic climate.
A redemption rights provision provides that the investors can vote to make the company redeem their shares at the original purchase price after a period, usually five years after the investment, with payments in instalments.
This right is generally limited by applicable local laws. For example, some laws allow the company to not redeem shares when it would cause the company to be insolvent. The redemption rights provision acts as an exit for investors, increasing investment liquidity.
When venture capital investors want to cut their losses and withdraw their investment, the investors can exercise their redemption rights and cash out.
Venture capital investors may insist on having veto rights to protect their minority stake. Some common actions of the company where investors may exercise their veto rights include the creation of a new class of shares, change in the Board of Directors, amendment of the articles of association to change the number of shares and sale of the company.
The venture capital firms may include their liquidation preference in the provisions. The liquidation preference is a right that allows the preferred shareholders to receive a certain amount of proceeds before other shareholders upon liquidation or winding up of the company.
Crowdfunding refers to many individuals or groups funding your business venture. The most popular way to crowdfund is to present your business on an online crowdfunding platform and attract investors to fund you. There are a plethora of crowdfunding websites that provide different investment options.
Here are different types of crowdfunding.
In equity crowdfunding, investors get a stake in your business venture for the money they invested in.
Here are some popular equity crowdfunding sites:
This involved borrowing money from investors, which you are obliged to pay back at an interest rate at a set date. If a substantial amount of money is borrowed, security in assets or a personal guarantee may be required.
Here are some popular debt crowdfunding sites:
Unlike in equity and debt crowdfunding where you give up a stake in your business venture or obtain a loan, you offer products, services, or discounts in return for the investment fund in rewards-based crowdfunding.
Here are some popular rewards-based crowdfunding sites:
This type of crowdfunding only applies to start-ups related to charitable causes. The investors fund your ideas and demand nothing in return as a gesture of goodwill.
Here are some popular donation crowdfunding sites:
You can obtain loans for your business venture from several types of lenders, for example:
Commercial Banks: Commercial banks are ‘traditional’ lenders. The process can be slow because of strict underwriting. Banks may also deny start-up loans based on reasons such as lack of experience in the industry, business assets and client base.
Here is a sample Letter to Bank regarding a Business Loan Application.
Online Lenders: Different websites offer cash advances and short-term loans to businesses. The process is very fast compared to commercial banks.
Peer-to-Peer (P2P) Lending Websites: These sites allow you to obtain loans directly from other people without the financial institution being a middleman. The rates and terms of the loans are set by the sites.
Lenders assess your loan application with regard to several factors below:
Financial statements: Lenders will review your financial statements and accounting records, ensuring that they are detailed, accurate and complete.
Company Investors: Having prominent investors such as venture capital investors will be an advantage.
Time in Operation: The longer the business has been operating, the more likely the lender will favour your application.
Outstanding Loans: Your outstanding loans will be assessed to determine whether your business is capable of paying the existing debts and the potential new loan.
Credit: Lenders will perform credit assessment by reviewing your credit report, score and history.
When negotiating for a business loan, you should pay attention to the following details of the loan agreement:
Other incurred costs
Restrictive covenants on the business
Security or collateral
Required financial statements
Limits on the use of the loan proceeds
Here are some loan agreements for your reference:
Instead of obtaining funding from investors or lenders, you may also investigate business grants. These are schemes to fund start-ups to drive businesses, promote innovation and support different industries. These grants are often provided by the government, trade associations or large corporations. Grants are particularly important if you are running a social enterprise or a non-governmental organisation (NGO) that is not expected to be profitable in the future.
For business grants, normally you are not required to pay back the money so long as you meet the goals stipulated under the grant. This is a huge positive for your business venture since you are getting free money without diluting your equity.
However, competition is fierce, and a lot of work needs to be put into preparing the application. You will need to ensure that your business venture fits squarely within the object of the grant, otherwise you will just be wasting your time applying. The amount given in the loan may also be insufficient to fully finance your business. Nonetheless, grants can be useful as an additional source of funds.
Below are some points that you should note before applying for a grant:
Look carefully at the object of the grant, do you or does your business venture fit within the object? For example, are you a young entrepreneur under 30? Or does your business helps to promote social issues?
Grants cannot be obtained instantly since there is usually a time period of application each year
Innovative businesses or businesses with a social cause are more likely to get a grant
Most grants are only for existing business ventures
Local business organisations: Go to your local business associations and incubators to get advice on the type of grant you may apply for.
Government: Check government websites and offices to find relevant programmes.
Corporate grants: Large corporations may also offer funding to small businesses to give back to society.
Starting a business venture may be daunting, but there are myriad ways in which you can find strategic and monetary support. It is important to be able to effectively pitch your business idea so that investors trust and invest in your start-up.
For further information, check out our guide on the Top 3 Capital Raising and Investment Agreements for Startups with free investment agreement templates to understand more about the legal aspect of startup financing!
Please note that this is just a general summary of Business Venture Funding under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may want to speak to your local legal advisor.
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