Start up investment funding is the capital invested by the investors in the start up enterprises with the promising future in the trade. Start up investment funding is provided by three sources:
- Angel investors
- Venture capital investors
- Seed funding firms
Start up investment funding is a high risk investment as there are high chances of failure of the enterprise in earning reasonable returns over the investment. Start up investment funding is required by the enterprise in the phase when the company is in the niche stage and the products and services have not been launched in the market. Start up enterprise goes through different rounds of funding where the enterprise needs just enough of the start up investment funding to gear up the business.
Start up investment funding by angel investors:
Angel investors are the rich and affluent individuals seeking to make start up investment funding in the companies showing good growth prospects. Start up investment funding is a high risk investment where angel investors invest their own money; hence seek high returns on the start up investment funding. Angel investors seek as high as 15-30% ownership in the invested company in lieu of the start up investment funding. Angel investors make start up investment funding to earn as high as 10 times returns on the investment in the first 5 years of investment. In addition to the start up investment funding the angel investors also provide their contacts, advice, knowledge and experience to the start up enterprises.
Angel investors providing start up investment funding expect the enterprise to offer suitable exit strategy whish is in the form of selling the company or releasing the IPO of the company. The exit strategy enables the angel investors to get their investment capital back along with any profits if available on the start up funding investment.
Angel investors often join together in syndicates, groups, networks and firms. It is preferable to approach the angel investors from one of these syndicates for start up investment funding. It is better in the sense that these angel investors can not keep non genuine conditions for start up funding investment, as these angels are being watched by the entire group and may even be side lined by the group in case of any complains.
On the contrary there is benefit of approaching individual angel investors for start up investment funding as these angel investors can be persuaded to allow owners of the company to partially cash out in the funding round.
Start up investment funding by the seed funding firms:
Seed funding firms provide start up investment funding much like angel investors in the sense that they make small investments and also have some characteristics of the venture capital investors in the sense that they are the companies or firms making the start up investment funding instead of the individuals.
Seed funding firms provide start up investment funding to the companies in the earliest phase as early as the conception of opening a company. It is easier to locate seed funding firms for start up investment funding than angel or venture capital investors. Seed funding firms have a set standard deal for every start up investment funding. These firms help the enterprise with the business and technical problems along with the start up investment funding.
Venture capital start up investment funding:
Venture capital start up investment funding is provided by venture capital investors which are firms or trust which provide start up investment funding to the upcoming enterprises. They provide start up investment funding using other people’s money. Venture capital investors invest large amounts which are needed in the later stages of a start up enterprise. It is tough to locate venture capital investors as they also maintain low profile and come with tough terms of start up investment funding.
Venture capital investors seek huge returns on the start up investment funding. They may ask for as high as 10-20 times returns in 5-8 years of the investment. They also wish to own a part of the company which may be as high as 15-30%. Venture capital start up investment funding is for the start up enterprises which are less than a year old and need funds to start selling their products and services in the market.
Venture capital start up investment funding provided by the venture capital investors is provided against the exit strategy and the shares in the company. Venture capital investors seek 3 types of shares- ordinary, preference and debts. Preference shares are most profitable to the venture capital investors as these shares earn them the dividends irrespective of the returns earned in any financial year. Preference shares dividend is accumulative and is provided to the investor with arrear in case of any previous dues.
Venture capital investors provide upto 1 million pound start up investment funding along with their experience, advice, knowledge and contacts to the invested enterprise. It sometimes happen that more than one venture capital investors if interested in providing start up investment funding to one enterprise, they divide the deal among them.
If the business plan is concrete with the good returns earned by the enterprise in the very first year of it’s existence the chances are fairly high that the venture capital investors will get ready to provide start up investment funding. Venture capital investors are interested in making start up investment funding in those enterprises which approach them through some common contact. This provides the angel investors with a sense of security and confidence to make start up investment funding in that enterprise. The enterprise must not haphazardly approach too many venture capital investors for start up investment funding, as more is the times the business proposal gets rejected greater are the chances that the enterprise just can not crack any deal. This is because rejection by one or two investors spoils the reputation of the enterprise after which obviously no investors wish to take the risk of making huge high risk start up investment funding.
The start up enterprise must be cautious and go step by step to seek start up investment funding from the most suitable and reliable source.