This paper is on the topic of Finance resourcing for a new venture. The first section of the paper will analyze the performance of the organization on the basis of which they are seeking funding. The second section of the paper will discuss the short term and long term funding options with reasons of their selection. The third section will determine the funding requirement and how to utilize the generated by the company. The final section will recommend solution for risk mitigation with strategies to overcome them.
Funding or Finance resourcing is the most important element in perpetual existence of an organization. Even the most miniscule sized business requires business name registration, startup costs, business contact line and printed cards. Finance can be arranged from variety of options with the most common and initial source being personal funding. In addition, line of credit and loans are also available from financial institutions, relatives, friends, private investors and government backed funds (Henderson). Careful capitalization of small businesses is needed for ensuring cash flow never dries up for business sustenance. It is important for the entrepreneurs to be aware of the start-up capital and cash flow needs. Combining these two elements helps in deciding the total amount required for new business finance. With Financial resourcing, accompany can fund their own strategy such as new product development, addition of distribution channels, increasing production capacity and working capital arrangement for short term & long term.
Back Door Entry (BDE) is a fast growing company operating in real estate technology. Their platform uses tool for commercial real estate which streamlines and expedites through the leasing process with use of HD video guides, tour distribution and reporting analysis. Already the business is operational in 14 major cities in United States and is on its way for setting industry standard in the field of commercial real estate. The video content platform works with the accumulated data in tandem and provides portfolio stats in real-time to users simplifying the process of leasing. With its technology BDE has enabled brokers with efficient mean to operate with pre-qualifying leads. This increases the productivity of parties which are involved in the leasing process by helping landlords in main effective decisions on the basis information (Crunchbase, 2013). Among its esteemed clients are companies like Boston properties, JPMorgan Chase and TIAA- CREF and other brokerage communities who have given BDE their substantial support. Operations are currently active in 14 markets across United States and plans are underway to enter 5 new markets before expanding internationally (Sormani, 2013). Currently, the revenue model adopted by the company is subscription model which has been finalized after trying out other models. After analysis and understanding the market BDE finally zeroed on subscription model for its revenue source. With company on the verge of hitting profit within space of few months, BDE has expansion plans on the horizon and are only a major funding away from transforming itself from small real estate technology firm based in United States to a nationwide destination for customers looking to lease commercial real estate (Beckerman, 2013).
Start-up business is backbone of economy in case of hiring and hiring needs capital which is quite hard to arrange in some cases. Initially most businesses are based on arranging finance from personal sources like friends, family or personal savings. Start- up business arranges funding from multiple sources over a period of time and depending upon need. Arranging funding is not easy part of any business as the investors are keen to look at projections, business model and sales pitch for fund raising. Whether you are a start-up which is seeking seed fund or operating small business with aim to grow, it is essential to remain flexible, optimistic and persistent on your efforts. Short term funding helps a firm in initiating their business endeavors whereas long term funding is required for business growth and boosting its profit margins.
Most start-ups these days are focusing their attention on raising funds for their business from their own pockets also known as boot strapping. This self-funding activity is the easiest form of fund raising for investors who have to arrange money themselves unless they are able to present their business’ potential to outsiders for formal funding. This can be done with use of money saved in saving accounts, 0 interest credit cards, leveraging personal assets and deposits. To use personal funds one must be fully confident in their vision and failure should not be an option when investing personal money in a start-up. When first investment in business is from owners pocket future investors are more likely to be interested as they are ensured that the owner is also another investor in the company (Gleeson, 2013).
Kiths and Kin
Another source which can be used for short term funding in business is funds from friends and family. They are closest to you are most capable of understanding your talent to make your vision into reality. The only downside of raising capital from family is risking relationships in case you are unable to return their investment. Use this money for initial start-up tasks like website building, other pitching materials, basic operations, etc. In some cases this money can be treated as loans without interest or borrowed money for a small period of time to get things going (Gleeson, 2013).
Small Business Loans
This is a route which is generally taken by most entrepreneurs who are unable to raise money from their personal sources. There are firms like All Business Loans who have stood out in lending short term loans to start-ups and their COO Mike Kevitch has stated “Startups seeking money from banks need a good business plan, profitable projections and some of their own money in the game” (Gleeson, 2013). Companies like All Business Loans specialize in lending small businesses with short term loans with easy and access to the funds. Startups needs funds for its daily operations in their initial runs and companies like All Business Loans can become the heartbeat of companies which are constantly out of working capital. One of the biggest advantages of debt financing is that the owners don’t need to sell any part of their company.
Long term Funding
Once your business is up and running you need to arrange further funding to start working to take it towards profitability. For this many entrepreneurs look up to seed fund companies which can help in raising small investment on the basis of potential of business model, sales projections and future funding possibilities. The most commonly used long term investment o funding means are angel investment and Venture capital.
Many startups over the years have been news for fund raising from Angel investors which is related to leveraging and timing of contacts. Angel investment is also another common name of “Kiths and Kin” investment, to invest in new businesses which are in initial stage requires large amount of trust which can be paid back with return on investment. Angel investors get involved in startups in early phase and cash out big when Venture funds start viewing the company as potential goldmine. Another thing that has to be kept in mind is that angel investors become part owners in the business and startups have the fiduciary responsibility to act in their interest too. It essential to build a relation on the basis of trust when taking angel investors into consideration, it is important to make logical projections and have strong business plan (Gleeson, 2013).
Venture capital is the most popular and well renowned method of raising capital for startups and usually follows up after firm is in strong position and appealing as a profit unit for the investors. While dealing with Venture capital firm business gains long-term funds in exchange for equity. Companies with high growth potential and start-ups with strong business models target venture capital for expansion purposes. Many businesses use venture capital as expansion tool, fund for buy-outs/ins, development of new products or buying technology for advancement (scotland.gov.uk, 2013).
Private equity funds are mainly of 4 types:
Independent Funds are most common kind of private equity fund. Capital supply is from third parties with no party holding a major stake.
Captive Funds have one single shareholder which contributes to the capital. It can be a bank subsidiary or industrial company searching feasible investments in their sector.
Semi-Captive Funds have majority shareholder and few minor shareholders. They are financial institution subsidiary or they run as separate company.
Finally, Public sector funds which are made of complete or partial public sector supplied capital.
Interest of venture capital firm depends upon firm’s life cycle stage or position in development cycle. A new startup once has an established structure, dependable business plan and continuous operation – its can start to attract venture capital firms. Though, some companies prefer to get involved with Venture capitalist in later stages mostly third or fourth growth round when expansion, public offer or merger is on the horizon.
There are two basic ways to calculate the amount of funding required in a startup, these methods are usually followed up by Venture Capitalists before they invest in a company.
Recent comparable Financings
The best way to calculate funding required is going by industry trends and checking the amount of funding competitors and companies of similar size have arranged in past few months. There are several databases which can provide such information like Venture Wire, VentureXpert and VentureSource which provide information for establishment of valuation of funding. Any transaction older than 24 months cannot be considered as appropriate valuation for our own company. Many Venture Capitalists, entrepreneurs and industry moguls are already aware of the possible valuation on the basis of experience and industry norms.
Potential Value on Exit
Venture capital firms base valuation on the exit value of company. This value is calculated on the basis of either recent M&A in the industry or valuation of similar public companies. Early stage investors are mostly looking to make 10-20 times the money they have invested and later stage investors are keen to secure 3-5 times their investment from funding startups (marsdd, 2009).
Funding arranged will be utilized for expansion capacities with new portfolio management software which can become the driving force or competency of the firm. A software which is used to centralize and optimize data for leasing purpose for Broker and Landlord’s use will unlock a new class if technology in real estate analytics. At present, there is very less real-time information for Brokers and Landlords to which they use to respond as statistics available is decades old, with this software this problem has been marginally solved (“Sormani, 2013”).
Pro Forma projections is a method used for presenting current business numbers in standardized format by including information on the basis of accounting procedures. For calculation of numbers in Pro Forma projection is an accounting job which combined with future prediction of numbers helps in setting numbers which firm aims to achieve in set time. To conduct Pro Forma projections following steps have to be followed:
Firstly, start by estimating monthly income that will be generated in the first template. Make adjustments in the months where sales are supposed to go High and Low on the basis of market condition, seasons and other conditions which affect your business (Sardisco, 2013).
Next, estimate expenses which be based on industry norms and calculate the total sales and deduct the expense total from it. Also, place the monthly expense in your template (Sardisco, 2013).
Now review both columns of sales and expense total and measure the total number of sales needed for generating profit and hitting the numbers which have been mentioned in the sales projection (Sardisco, 2013).
You can contact SCORE (the Service Corps of Retired Executives) for free review on the projections you have made and utilize the suggestion to make improvements in the Pro Forma Projection (Sardisco, 2013).
Risk management can be done by understanding risks which impacts organizational objectives and implementation of strategies for mitigation and management of management, technical, marketing, programmatic and cost risk. Most common risk mitigation strategies are:
Risk mitigation strategies
Some risks are just not worth taking. It is essential to determine if risk is result of activities which are within business core or outside, in case it is outside risk level is deemed high and its is considered to cease and avoid undertaking such activities. In case they are part of core business, then it is important to consider other ways to perform tasks bu either avoiding or minimizing loss or risk.
Take Risk get Rewards, in case risk his low then nits has to be accepted as cost of business and acknowledging little or limited actions are taken for risk mitigation. Contingency fund or a plan has to be built for minimizing loss which was not anticipated previously.
Risk transference is done by transferring any risk or loss to third party like insurance companies. Risk can also be transferred is through outsourcing work which carry high level of risks. Many functions of an organization lik purchasing, payroll are outsourced to specialized service providers.
Control procedure can be used for risk prevention or detecting nay risk after it has actually occurred. In case the risk is worth taking and it is essential to organization’s core activities then it is necessary to manage and mitigate all risks (Dorian, 2011).
Startups have a daunting task in front of them and every year many new startups enter the market similarly many fail. Though guarantee of success is non-existent a prepared entrepreneur is always ahead of his competition. Financial limitation of resources greatly affects the business nature and operations. Thus, it is considered to be well financed when planning to have a successful and profitable business. Having the right funding at the right time can make or break any business and management of risks can help companies overcome any hurdle.
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Gleeson, B. (8/29/2013). 4 Realistic Ways To Fund Your Small Business. Retrieved from. http://www.forbes.com/sites/brentgleeson/2013/08/29/4-realistic-ways-to-fund-your-small-business/
(11/29/2013). Using venture capital to fund your business. Retrieved from. http://business.scotland.gov.uk/view/guide/venture-capital
(2009). How investors determine the valuation of your business. Retrieved from. http://www.marsdd.com/articles/securing-investment-how-investors-determine-the-valuation-of-your-business/
Sardisco, R. (2013). How to Calculate Pro Forma Projections. Retrieved from. http://smallbusiness.chron.com/calculate-pro-forma-projections-15823.html
Dorian, L. (2/2011). Risk Management: Understanding Risk Mitigation. Retrieved from. http://www.ica.bc.ca/ii/ii.php?catid=17