The Hardest Thing You Will Have To Do Is To Determine How Much Money You Need.
Now I can imagine a few different possible thoughts flying through the head of my reader. One of them being, well why not just over budget and then if there is money left over, what’s the big deal? Well, it kind of is big deal if you think about. Lets say for example that somehow you figure that for the things you will need for your first one to two years of operation, you really need say $25,000. Your calculation is roughly broken down into figures that seem reasonable.
For example lets say that you feel you should be able to build your website for around $3000. The number sounds about right, because you have heard plenty of people say that a professionally designed and developed website costs about that much. Of course you know that there is some sort of expense involved in web hosting, and that you also have to buy a domain. All this time since its the website you are believing is going to be the heart of your business you try to get a realistic estimate on it’s cost.
Now you realize that there are going to be other expenses as well such as advertising and if your buying and selling a product on your website you know that there will be some expenses involved in that as well. You figure by the time you are ready to seriously obtain the financing you will need you will be able to come up with all sorts of facts and figures to justify what you felt was a pretty solid number.
Yet there is something you just were not ready for. The people or places that you thought might want to lend you money along these lines, it turns out are not even interested in lending you that kind of money.
Now here is the part that you most like were not expecting to hear:
- The reason that they do not want to lend you “that kind of money” is not because you are asking for too much money. You are actually asking for too little money, and these venture capital firms are not set up to do business with these kinds of numbers.
- So naturally you figure, oh okay, I can take on an employee, maybe rent an office, etc. In other words now you are trying to figure out how to grow the expense for your “Lean Start Up” before you even get started, because the one lender you approached told you, his investors invest a minimum of $250,000.00
- The reason for these kind of figures are deceptively simple. The package that has to get put together to obtain venture capital funding, is quite complex. Also there is an expectation of high returns on investment (ROI). For decades banks have depended on readily available sources of low risk investment with a relatively nice return of 10% interest. [ More on this in some other forum ] So now when the venture capitalist is going to take “actual risk” he wants a significantly higher rate of return.
THE FIGURES I AM ABOUT TO SHARE WITH YOU ARE FROM
INSIDE SOURCES- SOMEONE ACTUALLY
IN THE VENTURE CAPITAL BUSINESS!
WHEN A VENTURE CAPITAL FIRM LENDS OUT THE KIND OF MONEY I MENTIONED ABOVE, THEY WANT 30% INTEREST FOR THE TERM OF THEIR LOAN. ADDITIONALLY THEY ARE EXPECTING TO GET PAID BACK THEIR ENTIRE INVESTMENT IN AROUND THREE TO FIVE YEARS.
No one I know (including myself) is actually seeking out this sort of investment. When I consider even the strongest of my ventures I simply cannot imagine wanting to get into such a seemingly raw deal as the one described above, Yet somehow in the end when the thing goes into a an initial public offering (IPO) then somehow everyone is happy and all the people involved make many millions of dollars.
[ To be continued ]Stephen C. SandersIp-Ipo.comWhen a project goes from an internet based venture to an initial public offering there are all sorts of large amounts of money involved. Therefore the largest companies often have an method of ownership where a significant portion of the companies assest are held by those who buy stock in the company.