Business funding 101

Starting a business is expensive.

For most business owners, funding their company is their first and most critical financial decision.

The way you fund your company may have an impact on how you structure and run your company.

Hence, knowing the ins and outs of business funding is important, especially for startups.

Before we jump into how you can receive funding for your startup, let’s have some background knowledge on funding first.

What does a series of funding mean

Some businesses take months or even years to find funding, while others obtain it much faster.

Interpreting startup and investment headlines will be easier if you understand what each round represents for a company.

Series A, B, and C funding rounds are just the beginning of building a revolutionary global company ready for an IPO.[1]

Venture capital firms support startups in stages.

Multiple rounds of capital are raised as a company's valuation rises due to increased likelihood of success, proof of concept, and client base growth.

Early investors tend to invest in successive rounds to keep their stake in the company.

Luckily, if you have a great idea and a great team, expect some Angel Investors to be interested in your startup.




Series funding

A venture capital firm funds a startup to give investors their first stake in the company.

Series A funding is normally done with preferred stock.

The valuation for this round is based on proof of concept progress, leadership, team quality, market size, and risk.

Series A funding occurs when a firm earns revenue, but not necessarily net profit.

This is the riskiest fundraising round. If the product/service is currently available, Series B funding is required to scale, compete, and gain market share.

The investment risk is smaller and the funding quantity is higher than Series A.

The company is valued based on industry performance, budgeted sales, and intellectual property.

Series C funding is provided when a company has established its commercial viability.

It is used to increase market share, make acquisitions, or develop new products and services.

It may also be used to prepare for an acquisition. This round of funding is actually the firm's exit strategy.[2]

How to raise funding

Always remember, there is no specific method to raise funds.

However, your personal finances and business vision will shape your company's financial future, that’s for sure. There are several ways to obtain an initial investment, such as self-finding, investors and taking loans.

Self-funding

In a sentence, self-funding means to fund your own venture. Self-funding gives you complete control over your company while assuming all associated risks, such as taking early retirement funds and jeopardizing it afterwards.

Hence, before making any major decisions, do consult your plan administrator and a financial advisor.

Finding investors

Investors can help you launch a firm by providing venture financing.

Normally, venture capitalists provide ownership stakes and active roles in the company.

Unlike traditional funding, venture capital focuses on high-growth companies, invests in equity rather than debt, and has a longer investment horizon.

Almost all VCs desire a seat on the board. As a result, be ready to part with some degree of control and ownership of your business in exchange for financial support.

The procedure generally follows a set of fundamental phases, such as:

             Find a VC: Look for individual investors or venture capital firms with credibility and expertise working with startups.

             Let's talk about investing: The investor will assess your company plan for investment criteria. Most investment funds target a specific sector, region, or stage of business growth.

             Review due diligence: In addition to the financial figures, investors will look at your company's management and market teams.

             Set the terms: If they want to invest, they must agree on a term sheet with all the details and the investment parameters.

             Investment: You can get the investment once you sign the term sheet!

Business loan

You consider a small business loan if you want to be in charge of your company but don't have enough money to get started.

A company strategy, expense sheet, and five-year financial projections will boost your chances of getting a loan.

These tools can help you estimate how much you'll need to borrow and will show the bank that you're a good risk.

Contact banks and credit unions to obtain a loan when you have all the materials ready.[3]

Valuing your venture

Like valuing a house, valuing your company is an agreement between you and your potential investors.

You can value revenue, profit, customer lists, etc. using algorithms and models. But it will still be a negotiation and an agreement.[4]

Businesses with stable revenues and earnings are generally valued as a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA), or other industry-specific multiples.

However, valuing a startup that isn't publicly traded or hasn't made any sales yet is even more difficult.[5]

Calculate valuation of your startup

If you have revenue and customers, you can use a model to determine and improve your startup's worth.

Not a final amount to utilize as negotiating power, but rather an initial point for establishing value.

Don't let your company's valuation determine whether or not you strike an agreement with potential investors.

Choose your arguments properly, recognize your leverage, and play your cards well for long-term success.

In the absence of revenue or consumers, the valuation is difficult to establish.

As it is all assumption, you can acquire a greater firm worth before shipping.

Shipping transforms everything and makes it quantitative, whereas pre-shipping assessments are subjective.

In the end, it comes down to how they want to invest and what other possibilities you have.

Your value and negotiation power will increase if you already have investors lined up.

So, plan properly if you only have one investor.[6]

Funding in Bangladesh

The history of startups in Bangladesh goes back to the emergence of bKash, founded in 2010.

It was funded by 'Money in Motion' of the USA and Brac Bank Ltd.

In 2013, IFC financed the project, and in 2014, the Bill and Melinda Gates Foundation did so.

When early investors withdrew in 2018, Ant Financial, an Ali Baba subsidiary, stepped in.

This made bKash Bangladesh's first unicorn, valued at around $1 billion (Brac Bank's Annual Report).

Hence, it took bKash eight years to get here.[7]

This year, Bangladeshi start-ups raised around $120 million by September 2021.

Many start-ups raised undisclosed seed and pre-seed capital as well.

The growth is notable from past years as, in 2020, the funding was about $40 million.

The general angel and seed-stage funding opportunities have improved.

Seeing this, we can assume Bangladesh to become an innovation and technology hotspot in the coming decades.

The Bangladeshi start-up environment has grown in recent years, producing more high-quality firms.

This year, many companies have raised funding but e-commerce, healthcare, logistics, education, and fintech continue to draw the most investment.[8]

Local companies getting funding recently

Many people's dreams of becoming successful entrepreneurs are destroyed due to a lack of capital.

While first-world countries have all the resources and support to start a business, Bangladesh does not.

So, the government's new project, Startup Bangladesh Limited, began investing in 7 Bangladeshi startups.[9]

The seven startups selected for the first series of investments are Pathao (ride-sharing/logistics), Dhaka Cast (health-tech), MonerBondhu (mental health and Wellbeing), Chaldal (e-commerce), Eduhive (education-tech), Sheba.xyz (domestic services and SME) and Intelligent Machines (software services).[10]

Apart from these startups, other rising startups, such as ShopUp (Series B), Jatri (Pre-series A), Paperfly, Maya (Seed), Sikho, Truck Lagbe, (Series A) etc also managed to raise funds from notable investors, for example, Valar Ventures, Ecom Express, IFC, IDLC, Anchorless Bangladesh, The Osiris Group and many more. Let’s look at the following chart to find out the raised funds.[11]

How to find and approach possible (angel) investors in Bangladesh

             Know-it-alls: The Dhaka startup community is tight-knit as it's a small town. They know each other well. Explore your network, ask for introductions, and reach out.

             Proxy: Following funding news is a common way to find out who are the active investors in any ecosystem. If you skim through the first six months of funding news in Dhaka, you will find the names of many of the active angel and VC investors.

             Some angels prefer confidentiality: In those cases, contact the investors and ask for assistance. People often want to help more than we think. Investors can also be found on Crunchbase and AngelList.

             Communities:  Bangladesh Angels Network has done great work. The platform has previously facilitated angel investments and has built a growing network of angel investors interested in Bangladesh. Contact them. Attend their events. There are also local events, incubators, and accelerator programs where you can meet potential angel investors. Incubator and accelerator programs like BYLC Ventures and Accelerating Asia can help you learn about fundraising and meet investors.

             Social media: LinkedIn has become a great place to network with potential angel investors. Investing in a LinkedIn profile for fundraising needs and connecting with investors is beneficial.

             List and research: Make a comprehensive list of potential angel investors using the above methods. Then start contacting them, mention your goal but also mention that you want to learn. Meet and share information about your company regardless of how a meeting ends.[12]

 

What an investor looks for and how can a startup impress them

Crunch the numbers

Investors want profit, assure them that your company will achieve its goal.

If your company has been operating for some time, you must demonstrate strong financial performance.

If your company hasn't yet launched, you'll need to show how much money you expect to make, when you'll hit your targets, and when your investors will see their money back.

A firm business plan

A solid business plan shows investors that you're serious about your venture and have thought about how to make money.

While a business plan alone won't convince investors to invest, it is required that your business plan should include your intended market, data-based, sales channels, marketing plans and goals, analysis of the competition for your product or service, projected timeline, and probable obstacles.

Novelty

The words “new and innovative” excite both investors and the general public.

In short, if the market is flooded with hundreds of identical products, your company is unlikely to succeed.

Explain to investors what makes your product or service unique.

You don't have to invent something new to show that your product or service is superior to your competitors; rather, this is your “competitive advantage” that will set you apart from your competitors.

A good story

What makes an investor choose one company over another with similar projected returns? Story!

The story of why this business is important to you, how the idea came about, and where you plan to take it can sway your investors.

What need will your business fill? What impact will it have? What sets it apart?

Opening with a story is a great way to engage potential investors.

Business-ready

Many people have good business ideas, but few have the drive and resources to turn them into a working, profitable business.

Show your investors that you can not only talk the talk but also walk the walk.

Clear investment structure

Buying stock in a company has legal implications, and investors will want to know you've thought about them.

You'll need a business structure that allows for outside investment.

For example, will investors who are partners or shareholders be able to vote on business decisions?

What happens if an owner wants to sell, if the business closes, or if the leadership changes?

This is likely to be a negotiated area.

Your investors may want a larger share at a lower price, or changes to the stockholder agreement.

Preparedness is key, knowing these issues are important and having thought about them.[13]

Investing is a business.

As a rising startup, show the investors you can do it better than their other investment options.

Prepare for both the best and the worst-case scenarios. But make sure you and your team deliver a successful and well-planned pitch.

Don’t forget to tell your story to stand out in the crowd. Good luck!

Citations

  1. https://www.investopedia.com/articles/personal-finance/102015/series-b-c-funding-what-it-all-means-and-how-it-works.asp
  2. https://startupfreak.com/what-does-series-a-series-b-series-c-funding-mean-in-startups/
  3. https://www.sba.gov/business-guide/plan-your-business/fund-your-business
  4. https://www.lightercapital.com/blog/how-startup-valuation-works-and-affects-financing/
  5. https://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp
  6. https://www.lightercapital.com/blog/how-startup-valuation-works-and-affects-financing/
  7. https://www.tbsnews.net/thoughts/startup-ecosystem-bangladesh-current-status-and-future-outlook-313441#.YWFHCMCcJao.facebook
  8. https://futurestartup.com/2021/09/20/the-state-of-startup-funding-in-bangladesh-till-september-2021/
  9. https://www.dhakatribune.com/business/2021/08/05/7-local-startups-get-tk15cr-funds-from-startup-bangladesh-limited
  10. https://www.thedailystar.net/business/news/startup-bangladesh-announces-tk-15cr-fund-seven-startups-2069565
  11. https://www.facebook.com/groups/Businessinspectionbd/
  12. https://futurestartup.com/2021/07/25/on-raising-angel-investment-in-bangladesh/
  13. https://aofund.org/resource/7-things-investors-look-investing/

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