Welcome to Module 4, Startup Financing. Well, this is a very typical curve for startup when it comes to fund raising and also the managing is cash flow. As you can see, at the very, very beginning you have negative cash flow. Why? That's because you just starting the company. No customers are paying for anything yet. You are yet to launch your product or your services. And you probably just developing the business model. You're just developing your product and services. So you will be burning money, hence negative cash flow. Sometimes we call this the valley of death. A lot of companies will die during this stage because they run out of cash. And typically, at the very, very beginning you are the one who are funding your business or maybe with your cofounders. Together you are the first investors of your company. As time goes by you probably want to start getting some outside money. At this stage is the seed money. Who would actually invest in your business at this stage? Well, here are the three Fs that we call. And the first F, of course, would be your family. Because they love you, they want to support you, and so they support you without questions, so they probably will be your next investor apart from yourselves and your co-founders. The second F, of course, will be your friends. Your buddy, your best friends, best buddies, who support you also, probably unconditionally. And they will say, I give you this money. You better make a good business, because I trust you. So friends, family are the most important initial investors. But what about the third F? Well, the third F is what we call the fools. Who in their right mind invests in a company that's pre-revenue, even have no product or service to talk about. And you're burning money they have no idea whether this company will be a successful company. And yet they will invest in your company. They are probably fools. So hence we have the FFF, friends, family, and fools. Putting the jokes aside, if your company has started to develop in any size, or shape, or traction, there's something you can now actually show to investors. So you want them to start looking at potentially investing in your company. And during this valley of death, the very, very early stage, you are looking for the angel investors. They are called angel investors because they are like angels. At this stage, where you really don't have, yet, a proper company, proper revenue and yet, they like to support you. But angel investors are no fools. You have to show them something that they like. Well, it could be the business model, the team, etc., etc. And if you have a prototype that you can show them, you can tell them your business model, the revenue model, and so on, and you can convince them, then they probably will invest. Now, so that is what we call the sit stage, the very, very beginning. Now, the next stage is the early stage still, because your company is probably still small. But in some point in time, you probably have achieved what we call the break even. If you can achieve cashflow break even that means, in theory, your company no longer require any investment and it can still continue on its own. But staying a small company is probably not what you want. I’m sure you want to expand, and really make your company big and great. So if you want to expand your company after you have achieved, probably, break even, or shall we call proof of concept, your concept is proven. You have shown people that Customers are coming, customers are paying for your service, and you can sustain yourself. So how do you expand? Well, you probably will start thinking about opening your second shop, your tenth shop, or hundredth shops. If you are actually a software or app services, You are starting to think about, I don't want to have just 10,000, 20,000 downloads. I want to have hundred thousands, I want to have millions, or even tens of millions. I don't want to just support one language, I want to support multi-languages. Essentially, you are expanding your market. You might even think about expanding overseas, have your first shot outside your home country. And now, any expansion would require a lot more investments and at this stage, you a reaching a growth stage, probably a rapid growth stage. And here is where you would probably engage another type of investors, they are called the venture capitalists or the VC for short. VCs love to invest in companies that are experiencing rapid growth. This is what they do very well. They want to find a company that they can help and finance them to grow rapidly. And to grow rapidly indeed needs a lot of money. So the VC typically will invest millions and millions of US Dollar. Now, here's also a dilemma. If you are a startup and you have reach a certain size, you start looking for Angel investment, which typically would be less than a million dollar or even $500,000 or even $200,000. And VC, by nature, they must invest multi-million dollars. Because for their size, and because they are running a fund, they have to invest the money within a defined period of time, typically three years. And VC also have their own investors who'll give them a mandate of deploying all the money in the firm within three years, as a typical timeline. But to do the due diligence, and to find enough good company to spend time to do the due diligence Is very challenging. And if you look at the time that they need to spend and the amount they are investing in each company and the size of a VC fund, soon you will realize VC cannot invest in very, very small company. They must invest at least multi-million. Sometimes five or even tens of millions of dollars. So, if you find yourself in what we call the funding gap. For example, you are a small company. You're looking for, maybe around 2 million US. Is a little bit too big for any angels but it's too small for the VCs. This is a very, very difficult trap. So if you are somehow in this trap, you have to either ask for more money or you have to reduce the amount because you are neither here nor there. That's the funding gap, probably around $2 million US. So if all things go well and you have your VC or more than one VC to fund your multiple growth plan, you will reach an even bigger size. Because by now, after several rounds of VC's funding you probably reach multi countries, you probably have a lot of customers and a lot of downloads if you are running apps and software. And growth is going to be more difficult still because you cannot get growth by just growing organically or it will be more challenging. You probably cannot continue to grow on a very rapid rate because you yourself have already achieved a certain size and you are kind of getting to be a giant. So for your next stage of growth, you will need even more funding. You might even be in a position to acquire other companies. Or even acquire your competitor. So you action even more funding to do so. And that's where we call the late stage where another type of investor will come in and they are called the private equity, PE for short. These kind of investment typically now would be at least are tens of millions, sometimes even hundred millions And they will finance you to grow even further, bigger, or make a lot of acquisition. If you continue that path, you probably will reach some stage where it is time for you to get an Initial Public Offering, IPO. So you can enlist on some exchange and that's where you start actually getting the financing from public. Now, from a angel round to VC, to PE, investors at some point are looking for a exit. Let's take angel investor as an example. I'm an angel investor, I invest in that initial stage. But, at some point in time, if the next investor, be it the VC, the private equity, if they want to invest and buy out the previous investors And give the previous investor a decent return. Multiple times of the investment that they put in, I will be very happy to get an exit with a decent return. If not, sometimes as an angel investors we will sit through all the different investment rounds, and eventually, you get an IPO. And so, we can also sell our shares in the market. And that's our return as well. As an investor, you are happy to get the decent return from any stage, from any other investors. Now what we have just seen is a very typical curve or journey of a start up from the beginning to IPO or exit. Now, of course, it can also very well that some point in time someone decided to buy you out, not just the funds, the PE funds or the VC fund but it could be your competitor. It could be a established company that want to acquire your company for whatever reasons. It could be strategic reasons It could be financial reasons that they want to acquire you. Again, that means that investors will be bought out and they will be happy to get a return on the investment. So this is a very, very typical curve that we have just shown.
