Many prospective entrepreneurs will agree that
raising startup capital for a new business is not easy. However, according
to existing business owners, the process of raising capital to expand an established
business may be considered even harder. To avoid the difficulties associated with
future funding requests, financial
analysts are now recommending that entrepreneurs keep in mind the probable need
for additional capital in the future, including potential business expansion plans,
before requesting capital.
Avoid underestimating funding requests
Additional capital may be difficult to obtain in the later stages of a companyâs
development, especially if the company did not successfully perform as initially
anticipated. This risk of failure is the main reason why many investors often do
not want to make follow-on investments within the same company. As a result, this
greatly limits an
entrepreneur’s funding choices. Future company funding, including
the prospect of expansion, should always be kept in mind when determining the amount
of capital needed since requesting an overestimated amount is considered better
than an underestimated one. Therefore, an entrepreneur needs to evaluate all possible
expenses before they approach a business
investor for capital.
Protect current investment
Many
entrepreneurs may choose to invest in other business opportunities once their
current investment gains stability because it provides another way to generate profit.
While becoming involved in another business endeavor is a good way to financially
protect a current investment, an
entrepreneur must create a balance between both
opportunities. It is this harmony that will enable the success of multiple business
endeavors. There are many ways that an entrepreneur can protect the interest of
the first business investor. Of course, this has a lot to do with the negotiating
and management skills of the
entrepreneur.
Common VC strategy
A very conventional approach of most venture capitalists is that they often do not
concentrate a lot of funding into one project. Instead, they like to spread their
invested capital among several projects at the same time. However, one of the best
scenarios for an entrepreneur is when the
business investor agrees to invest in the business once again. While many
investors tend to avoid reinvesting (follow-on) because of the risk that a company
may fail, it is a more common practice in successful technology companies which
are prepared to go public.
Convertible debt
Usually, most first time
entrepreneurs structure their first round of investment
in the form of convertible debt. This protects the business investor by providing
him with a price discount compared to the next round of funding. However, some entrepreneurs
are intimidated by resorting to convertible debt because it can often be an expensive
process, and the thought of accumulating debt can be daunting. When considering
convertible debt, the
entrepreneur must keep in mind the company event that will
trigger the conversion (i.e. the company revenue threshold), the amount of discount
that will be given when the conversion takes place, and a backup plan if the conversion
event does not occur. While the idea of convertible debt is often underrated, it
provides an effective way to secure investment funds without the need to establish
a valuation on a company. This can be extremely helpful in protecting early investors
from stock dilution (the reduction of an investorâs stock price from the initial
purchase price) that may occur in the next round of funding.
Conclusion
Most successful
entrepreneurs develop a financing strategy with the future in mind.
Therefore, they are aware that the amount of capital they initially request will
also cover the possibility of future expansion. By resorting to convertible debt,
they protect the interest of the first business investor and can avoid dilution
of the companyâs value.
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