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How to Acquire Capital?



Kirjoittanut: Nikolett Rőder - tiimistä SYNTRE.

Esseen tyyppi: Akateeminen essee / 3 esseepistettä.
Esseen arvioitu lukuaika on 9 minuuttia.

How to Acquire Capital

 

Introduction

Capital is a broad term that can be used to describe anything that offers value or benefit to its owner (Hargrave, 2021). In this essay, we will be talking more specifically about how to acquire money. In most businesses, there is a need for capital to be able to start running operations, expand, or for other reasons. It can be challenging to acquire capital, so we are going to give some practical tips on how to do it and what investors are looking for when searching for new opportunities to invest in.

 

Ways of Acquiring Capital

 

Bootstrapping

Bootstrapping is one of the ways that we as a team have been discussing. Bootstrapping is funding your business with your own money, without taking capital from outside. Some reasons for people to do bootstrapping are lack of experience formulating business plans and lack of entrepreneurial experience, lack of skills for product promotion and lack of relations with suppliers, not knowing how to acquire capital in any other way, and not wanting to share income with investors or not wanting to spend time looking for an investor. Sometimes it can be the combination of more than one of the previously said reasons. Some advantages that can come from bootstrapping are that the entrepreneur gets to experience while risking his money alone, so if the business fails, he must pay any debts. Being independent of investors’ opinions, the entrepreneur gets to make all the decisions alone. Attracting external funding can be a very stressful and time-consuming task so the entrepreneur would be able to redirect its focus to other fundamental parts of the business like product development or advertisement instead of looking for capital. Creating the financial foundation of a business is a big attraction to future investors or sources of capital, is easier to trust in a business that is already financially secure. But there are disadvantages also as the entrepreneur taking all the risk, limitations capitally and money problems when unexpected problems arise. (Corporate Finance Institute, N.D)

 

Family Donations

Family donations are when you receive donations in money without any paperwork so you can invest it in your business. That is also an option for some people in our team. All the circumstances are the same as in bootstrapping.

 

Government Grants

A government grant is a financial award given by the government to fund some beneficial project. Advantages of a government grant are that you do not need to repay the money like in a loan, the are multiple grants available so if your project qualifies and is chosen you can get more than one grant for the project, and it boosts credibility because it shows that the government believes and trusts your project. But it also has some disadvantages like it is very hard to apply for a grant, many criteria have to be reached, it can take months of preparing and writing a proposal and it can take even longer to know if the proposal has been approved. You are contractually bounded to the government, meaning that with governmental funding there are always strings attached, so there are rules, targets, and timescales to follow, this is so that the government can ensure that you are keeping up with your end of the deal. (S3 Solutions, 2021)

So, the government grant is a great option if your business goes with the government’s ideas and you have the time to apply for it and deal with the government in case it is approved.

 

Business Loan

A business loan is like a traditional loan but does not look at ethics or values, but it focuses on profit.

Advantages of a business loan are that you maintain control over your business, and banks do not get involved in any way in the running of your business, which means that you remain in full control and management of your company’s operations while receiving the benefits of extra cash. The interest in the business loan is tax-deductible, which means that what you pay in interest in your business loan, you will be able to save later on when paying taxes. A disadvantage of business loans is that they are hard to get, like in a mortgage the bank is extra careful when lending money, often borrowers must have some personal asset as a guarantee to the bank in case the loan is not paid. In the case of our team is not that easy, because the loan is taken by our cooperative, so we have decided that we as a team have to agree to it because all the members are going to be responsible per law to pay the loan back. ( Ling, 2019)

 

Crowdfunding

Crowdfunding uses the easy accessibility of vast networks of people through social media and websites to bring investors and entrepreneurs together. Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. There are different types of crowdfunding, the difference comes in the way of what the business gives back to the investor, the business can give equity of the company, or it can be reward-based, giving a reward like their product or early access to their site or application.

The advantages of crowdfunding are that the business can have access to a larger and more diverse group of investors and supporters. Ability to see the public´s opinion on your idea/product. The disadvantages of crowdfunding can be that damages your startup’s reputation because you had to use crowdfunding, the fees that crowdfunding sites collect, and there are crowdfunding sites that if you don’t achieve your funding goal you are obliged to return the money that you already got to the investors.

Crowdfunding is very used nowadays and a great option if your product is something original and something that people feel that they would want a company doing. Because there are so many places where people can use their money on the internet so your company has to have something that catches the eye of people online. (Tim Smith, 2021)

 

Angel Investment

An angel investor is a person that normally has cash available and is looking for a higher rate return on their investments. They usually invest in new or small businesses and return they get equity in the company. Angel investors normally are a friend or family of the entrepreneur, a wealthy individual, or a part of an angel investor group that serves to possibly augment the investment capacity.

An advantage of receiving an investment from an angel investor is that you do not need to repay the money that you got back, unlike in a loan where even if the business fails you need to pay back the money that you got. Also, the angel investor has experience in business so they can give valuable advice and mentor new startups. A disadvantage of receiving investment from an angel investor is that you don’t have any more complete control over your business, now the angel investor has a say in the business decisions and when there are profits, or the company is sold the angel investor gets a share of the money. (Ward, 2020)

 

Venture capital

Venture capitalist firms are usually limited partnerships where they invest in the VC fund. Then the fund has a committee that is in charge of making investment decisions, when they have identified a promising emerging company, the money invested in the fund is used to fund the identified company in exchange for a sizable stake of equity. The companies that the VC fund normally targets are start-ups or small companies that are looking to commercialize their idea. The difference between venture capitalists and angel investors is that venture capitalists control a pool of money from their investors, while angel investors use their own money.

Advantages of venture capitalists are that you get needed capital for expansion, if you can’t get the capital from personal investment or loan, a venture capitalist is a great option. You also get the experience of the venture capitalists as they’ll participate in the decisions of high importance, their background and previous experiences can help a lot your company. In addition, the venture capitalist has several connections in the industry, which means that their network can help the company. Some disadvantages are that you lose control, the investors are going to demand right such as voting rights, board seats, etc. Also, you lose ownership. Bringing in investors diminishes the ownership percentage of existing owners, and usually, new investors demand anti-dilution protection, meaning that when the company receives more investment, it will dilute the percentage of the entrepreneur more than that of the previous investors. (Gordon, 2020) (Ganti, 2022)

 

Funding a project

Why do some startups get funded and others don’t? How does the government decide whom to fund? How do investors decide? How can you help a project or startup of your choice?

 

What are investors looking for?

From an investor’s point of view handing out money is a way to reduce the amount of time that they would spend on the same project. It can have many reasons and usually, investors use multiple strategies to get what they want. The most common cause for investing is to receive more than what has been put into the project. However, there are more altruistic investors who would like to see a change happen with the help of their money. In this case, the perceived value of the change is bigger than the amount of money invested. In contrast with the government grants, investors usually don’t look for NGOs, but rather startups or bigger, established enterprises with a focus on profit.

  • Angel investors: They look for companies in a specific field. Make sure you state your expertise in front of the investor. Giving a coherent and well-written pitch is also important. Tell them if you need mentoring on a subject because they are usually open to that.
  • Venture capital firms: Know your numbers. Before giving a pitch, make sure you did proper research on your idea and ideally, you already have a minimum viable product (MVP) and the first customers.
  • Banks: A business plan is essential when you are applying for a bank loan. It should contain a detailed description of the business, core products, services, financial projections, management projections, and plans for goal implementation (Upcounsel, 2020).

In general, we can say that investors are looking for the following traits in a startup: the potential to grow, sustainable and ethical, strong financial plan, clear plan for the use of investment money, risk assessment and don’t forget about the importance of a dedicated founding team (Crest Legal, 2021).

In case you are wondering what statistics should you show to an investor, KPIs are what they are looking for. KPIs are an acronym for key performance indicators. This includes but is not limited to financial metrics, customer metrics, and process performance metrics. The most common KPIs are revenue growth, revenue per client, profit margin, client retention rate, and customer satisfaction (Twin, A. 2021).

 

How to get funded by the government?

Government grants are often targeted at NGOs rather than individuals. What should you consider doing if you have a non-profit organization and want to get funded?

  • Do proper research before you apply for any funding. Many opportunities require you to comply with specific criteria.
  • Record the details of the program in one place. Details like program number, name, and deadlines.
  • Try to contact the grant representative. It will help you get an insight into the program and can even give you an insight into the selection process. If you contact the responsible person you also avoid misunderstanding and wasting your time.
  • When you apply, double-check the guidelines, the text, and your documentation. Sometimes it is worth it to hire an outsider proofreader.
  • Submit your application at least a day before. It is a safety net for realizing that something is still missing from the documents or perhaps you need to make last-minute changes.
  • Make it clear why the government should fund you and what lasting impact would your organization make on the community.
  • If you have investors already, great! Write them down in your application. If you did not receive any outside investment search for them because it can mean a switch from a negative to a positive decision in the end.
  • Show what have you done already to support the community. It can be from previous projects or the one you are applying with.

If you received a positive decision, it’s important to maintain an excellent activity record. If investors had high expectations, you can imagine what the government has. This includes regular reporting and fulfilling the program’s goals before the deadline.

Both the government and external investors are looking for solutions that are innovative but replicable (fundsforngos.org).

 

Conclusion

There are a lot of different ways to acquire capital for your organization and a lot of motives to do so. Bootstrapping, family donation, government grants, business loans, crowdfunding, angel investment, and venture capital are the most commonly used ways to acquire capital. To get the desired investment you need to take into consideration what are the expectations of a potential investor. You should do an accessive amount of research before you apply for a grant or give an elevator pitch and think deeply about what are you going to sacrifice to get it, so you will be prepared to make the best decision on the spot. After you did your own research tailor your pitch, presentation, or business model to the type of investment you are looking for. Most importantly don’t get discouraged if you don’t have enough money to start a project, instead, look for ways to acquire this capital from somewhere else.

 

References

Corporate Finance Institute. N.D, Bootstrapping.

Bootstrapping – Overview, Stages, and Advantages (corporatefinanceinstitute.com)

Crest Legal. 2021 What do investors look for in a startup?. https://crestlegal.com/what-do-investors-look-for-in-a-startup/

FundsforNGOs. 11 Things to Consider Before Applying for Government Funding.

https://www.fundsforngos.org/article-contributions/11-applying-government-funding/

Ganti, A. 2022. Venture capitalist.

Venture Capitalist (VC) Definition (investopedia.com)

Gordon, J. 2020. Advantages and disadvantages of VC funding- explained.

Advantages and Disadvantage of VC Funding – Explained – The Business Professor, LLC

Hargrave, M. 2021. Capital.

Capital Definition: How It’s Used & Main Types (investopedia.com)

Ling, T. 2021. business loan: advantages and disadvantages.

Business Loan: Advantages and Disadvantages – Kashoo

Smith, T. 2021. Crowdfunding.

Crowdfunding Definition (investopedia.com)

S3 Solutions. 2021. government grants: advantages and disadvantages.

Government Grants: Advantages and Disadvantages (s3solutions.co.uk)

Twin, A. 2021. Key Performance Indicators (KPIs).

https://www.investopedia.com/terms/k/kpi.asp

Upcounsel. 2020. Types of Investors: Everything You Need to Know.

 https://www.upcounsel.com/types-of-investors

Ward, S. 2020. The pros and cons of angel investors.

The Pros and Cons of Angel Investors (thebalancesmb.com)

 

 

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