Chapter 1

Learning About the Funding Ecosystem

IN THIS CHAPTER

Understanding funding terms and definitions

Moving from idea to successful execution

Why do we need startup funding?

How startup funding has evolved

Examples of startup funding that worked

Congratulations — you’ve come up with a business idea that passes the laugh test and now you may be feeling like you’re taking a cross-country road trip. You’re sitting in your ready-to-drive automobile, you have your phone connected to your car’s computer system, and you have some notion of where you’re going to go.

But when you step on the gas pedal, nothing happens. Just as a car won’t go without gasoline in its fuel tank, the lack of money in your business means it won’t go very far and your grand dreams will stay locked in your head.

Sadly, many fantastic concepts are never brought into the real world because the founder(s) don’t have enough money to do that. When you have a new business, expansion is always the objective, which is why you’re reading this book.

No matter if your objective is to broaden your customer base, expand into new geographic areas, or develop innovative new goods, you need two things to succeed: access to sufficient financial resources and financial stability so you can get around the roadblocks that you’ll inevitably encounter on your trip.

As you embark on the journey toward securing funding for your startup, keep in mind that you are not on this journey alone. This book will serve as your guide and provide you with the information, strategies, and self-assurance you need to acquire the capital you require and accomplish the objectives you have set for your company.

So, fasten your seat belts, put your favorite beverage in your cup holder, and get ready to enter the exciting world of startup financing. There’s excitement up ahead.

Understanding Funding Terms and Definitions

Before we start your trip into the intricate world of startup financing, we need to stop for a moment to acquire a solid understanding of the 30 fundamental funding terms and definitions. After all, you need to know what the signs and road markings mean on your journey before you go.

Whether you are an experienced businessperson or just getting your feet wet in the world of entrepreneurship, these definitions will also serve as your compass.

• Accelerator: An organization or a program that offers early-stage entrepreneurs’ resources, funding, and coaching in exchange for a share of the company’s ownership. A demo day is typically the finale of an event, and it is during this time that startups give presentations to potential investors.
• Angel investor: A generous individual who possesses additional financial means and recognizes the potential in a newly established business. They offer monetary assistance to a company throughout its formative years to aid in its growth and development. Angel investors typically offer not just financial support but also useful connections and direction for the entrepreneur.
• Bootstrappers: People who finance the expansion of the business primarily through their own personal resources and the revenue generated by the company itself, typically avoiding the need for outside financing.
• Bootstrapping: Refers to a method of beginning a business that makes use of the founder's resources or the revenue generated by the business itself. It is like having resourcefulness and independence, as well as beginning your business from scratch without receiving capital from outside sources. The practice of bootstrapping typically involves adhering to a stringent budget and making effective use of the resources that are already available.
• Burn rate: The amount of money that a business spends in order to meet its operating expenditures before it starts to experience positive cash flow.
• Business plan: A comprehensive document that describes every aspect of a business. This document provides an overview of the company's goals, strategies, day-to-day operations, financial projections, and marketing initiatives. It’s your company’s road map that not only helps founders and investors grasp the potential of the business but also tells you, your team, and the plan’s readers the path that it will take to achieve success.
• CAC (client acquisition cost): The cost of acquiring a new client is referred to as CAC. It compensates for expenses incurred in connection with operations including marketing, advertising, and sales.
• Convertible note: A convertible note is a type of financial instrument that is used to finance businesses. It is a loan that is provided to a company by an investor with the option of being converted into ownership equity (shares) later, typically when the startup receives more significant funding. Convertible notes are a form of early-stage financing that enables startups to access capital without committing to a specific ownership interest right away.
• Crowdsourcing: The practice of soliciting monetary contributions from a large number of individuals (referred to collectively as the crowd) to finance the development of a product or the operation of a business. It happens rather regularly on several websites.
• Due diligence: This term refers to the process of investigating and assessing a business in great detail. It is analogous to performing a comprehensive check of everything to ensure that everything is in order before making a significant financial investment. With the use of due diligence, investors can discover the risks and opportunities associated with a business.
• Equity: Another name for an ownership stake in a business. When you have equity in a company, it indicates that you are the owner of a certain number of the company's shares. Think of it as having your own slice of the pie, or your proportionate share of the overall value of the company.
• Equity financing: Entails selling ownership shares, often referred to as equity, to investors. In exchange for a share of the company, these investors provide financial backing to the business to facilitate its growth and daily operations.
• Exit: In the context of new businesses, an exit refers to a favorable event in which the company's founders and investors receive a return on the money they invested. Common exit strategies include selling the company, going public through an initial public offering (IPO), or merging with another business.
• Exit strategy: A well-thought-out plan that outlines how founders and investors anticipate departing from or profiting from their engagement in a corporation. It encompasses possibilities such as selling the company, going public via an IPO, or fusing with another business.
• LTV: This is an acronym for customer lifetime value, which is a metric that estimates how much money a company can anticipate receiving in total from a single customer over the period of that buyer's relationship with the company. LTV can be used by both new businesses and established companies.
• MVP: This is not an acronym for most valuable player — in business, it means minimum viable product. This term refers to the most basic model of a new good or service that a newly established business can create and introduce to the marketplace. A test version was created to gather feedback and determine whether there is interest in the product before investing a significant amount of money in its development.
• Monetization: The process of generating cash or profit from a product or service offered by a startup company. It requires determining how the organization will earn revenue, which could be accomplished by subscriptions, advertising, sales, or some other approach.
• Pitch: A brief and persuasive explanation of a company concept given by an entrepreneur to prospective customers, partners, or investors to gain their business's support. It is analogous to putting up a compelling argument as to why individuals ought to back or invest in the company.
• Private equity: Investing in or purchasing ownership stakes in privately-held companies. It is typically not traded on public stock exchanges and typically involves higher investments in established companies with the purpose of either promoting expansion or boosting the operational efficiency of the business. Private equity investors could improve their earnings by purchasing, reorganizing, or selling enterprises in the market.
• Product-market fit: When the product or service offered perfectly satisfies the requirements and expectations of the market it intends to serve. This ultimately results in a huge uptick in customer satisfaction and adoption rates.
• ROI: This is an acronym for return on investment, which is a method for determining the profitability of an investment by making a comparison between the gains or profits gained from the investment and the capital invested. It makes it easier for investors to assess the performance of their investments and determine whether they made a sound financial choice.
• Runway: This term defines how much longer a business can continue operations before it runs out of money. It considers a variety of factors, such as the cash reserves that are accessible, routine spending, and projected...