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Funding for startups

Lets Decrypt – Seed / Angel / Venture / Private Equity Funding !!

What is Seed Funding?

I feel at the very beginning a business Idea is born in the minds of the owners. Only then they look out for ways to give life to that idea.  Once they become more than 100 % sure of the idea & wish to start, then the first process will be to incubate this seed of thought. This is when they will need small sums of money to start the business, to plant this seed. The money collected at this stage of the business can be termed as seed funding. This is normally collected via Friends, Family or Anyone who have the confidence to lend you out without any terms & conditions as such. These people also don’t seek any part in management etc.

  • Ideal Input         : A business Idea who time has come.
  • Ideal Output       : A working prototype, or a working business model.
  • The money last for max 3-6 months.

Time for Angel Funding

The funding at idea conceptualization stage last only for some months However the as a result of the work done during seed funding the owners can now have a working model to get them a few customers or accounts at the least, who are willing to buy the business product generated out this idea. This is the time when can seek for an Angel Funding.

Once the Angel Investors are convinced of the idea & concept & have a belief in it due to the working business model that they will invest some considerable amount in the business. They need some working business in the company to do a financial valuation of the company in monetary terms – to get is actual Dollar/Rupee worth.

An angel investing $200 thousand or more would probably expect any of the following privileges.

  • Might want a seat on the board of directors.
  • Might also want preferred stock.
  • They will seek protection against VC’s getting major chunk in the future or diluting their equity.

The Angel Funding money usually lasts for 1-1.5 years.

Here comes the Venture Capital Funding Now

Once the founders are ready with their now somewhat concrete business plan and able to demo a real, working system which has begun to take shape & grow in size, it time to visit the VCs.

The VC offer their terms in a term sheet – which I think can be stated as an excel sheet with all the conditions related to the funding.  After that if the founders have accepted the offer (i.e. the term sheet) , the VC firm goes for a background check of the company. This due-diligence is a normal procedure done by the VC to check for any hidden flaws or risk with the business model.

The VC then gives their valuation of the company, or in simpler terms what is the worth of the company according to them.

Say they measured the company worth at 4 Million dollars & are ready to offer 2 Million dollars of funding. This funding is usually spread over a period of time & given in small buckets ( we often hear Round 1 of funding, Round2 of funding etc.)

Here is a great quote on the relationship between Angel Investors & VC funds which tells a lot about their relationship:

“VCs regard angels the way a jealous husband feels about his wife’s previous boyfriends. To them the company didn’t exist before they invested”

Only they have the money, the startup will almost certainly hire more people at this point & use the money for expansion.

Private Equity are also here

By actual bookish definition PE funds is an umbrella category that consists of all the funding’s I have stated above i.e. angel investors, VC funding, hedge funds etc.  But in today’s lingo the term Private Equity has the connotation of meaning “everything but angel or VC” – & that would primarily be Hedge Funds.

Private Equity firms’ buys majority control of an existing or mature firm.

This is distinct from a venture capital or growth capital investment, in which the investors (typically venture capital firms or angel investors) invest in young or emerging companies, and rarely obtain majority control.

Leveraged buyout, LBO or Buyout refers to a strategy by private equity firms of making equity investments as part of a transaction in which a company, business unit or business assets is acquired from the current shareholders typically with the use of financial leverage

Finally it’s time for Payback – Go IPO Go

Once the company has been established well & doing good business with healthy balance sheets, it would be the right time for next round of funding – the biggest of them all – by going for an IPO.

An IPO will act as a payback time for all the founders, seed investors, angel investors & VC investors. As their shareholding will have actual worth in the capital market of the country.

For the business as well, this could be a possible opportunity to collect huge sums of money from the primary market & keep on scaling to new heights.

 

facebook_membership

Do you know Facebook now accepts Credit Card Reward points as a virtual currency?

 A recent, small though important development, in the payments arena came to my notice. American express – a leader in closed loop credit card business – has launched a new virtual currency for its merchants & small business owners which can be used on Facebook.

Actually, this virtual currency is nothing new, rather Membership reward points only. Thus Amex card members can use the merchant reward points accumulated on their card account as a virtual currency to buy advertising space on Facebook.

Thus in one shot AMEX has achieved:

  1. A way for its customers (read Merchants/Small Business) to reach 500 million potential their customers via Facebook ads & promote their business. (Already 35 percent of entrepreneurs use Facebook to promote their businesses)
  2. An incentive for its customers to use AMEX services more & more, and thus earn Membership Reward Points.3.  
  3. Customer loyalty & long term relationship
  4. Establishing a relationship with Facebook since they have accepted to redeem AMEX reward points as a virtual currency.
  5. Finding genuine ways to promote business for its customers. It’s a win-win for both Amex & its customers.

A step further in this direction could be the sale of Facebook credits for Membership reward points. Thus any credit card customer could then buy FB credits in lieu of his collected credit card reward points & then use these FB credits as a virtual currency in the Facebook social world.

Facebook_Gifts

Do you play Games on Facebook? Get ready for Facebook Credits.

With over 500 million users worldwide (source: Facebook) & the most dominant & largest social networking platform, Facebook has surged ahead by leaps & bounds. Facebook, with more than 50% control over virtual goods offered in social games on its network, is looking at as a huge revenue stream.
And this is where a new payment stream of ‘Facebook Credits’ will come in picture and add-on to the existing revenue line.

What is this?

While playing games online the players have the option to buy Virtual goods in the game. Virtual goods include weapons, tools, animals, and practically anything imaginable in the context of a social game. The currency used for such purpose is called the In-game currency. This is a virtual currency that a developer creates for use in a specific game or set of games. In-game currency could be “directly purchased by users with real money (i.e. Dollar, Pounds etc.).

Let me try share an example here:
While playing online Mario Bros. Game or Super Contra or Commando (oh used to love those!!) the player can buy an extra life or special weaponry etc. virtual goods. The player needs to pay using the in-game currency. The players can get this in-game currency by paying in real money (via Paypal / credit card etc.) to the game owners directly. Thus Social game developers generate revenue when users purchase “virtual goods” and “in-game currency” during game play.

Facebook Credits is a virtual currency system or an in-game currency system which shall be used by the social gaming audience on Facebook to transact & buy virtual goods in their social games. For example, in the popular Facebook game “Farmville,” players manage a virtual farm by growing crops and raising livestock. Players can purchase virtual goods like tractors. The currency shall be maintained by Facebook.

  

An extension to the Facebook Credits is that users can further use the Facebook Credit outside their games as well to buy Virtual Gifts. A Facebook user can purchase a virtual gift through the “Sending Gifts” application and give it to a Facebook “friend,” who would then have the gift displayed on his or her profile.

Source: Facebook, Send Gift on Facebook, http://apps.facebook.com/sendyougift/

Change is Law

  1. Presently, game developers have the option, but are not required, to use Facebook Credits as their sole in-game currency on the Facebook platform.
  2. Effective July 1, 2011, however, Facebook will require social game developers to exclusively utilize Facebook Credits for the purchase of virtual goods.
  3. Users must purchase Facebook Credits directly from Facebook and then use the Credits to purchase in-game currency.
  4. Users must purchase Facebook Credits from Facebook with a credit card, PayPal, Or a mobile phone.

 

Revenue Potential

  • Developer revenue from virtual goods purchased in social games in the U.S. totaled $865 million in 2010, and is expected to hit $1.25 billion in 2011.
  • 

  • Facebook Revenue shall be a 30% of the developer revenue as game developers must pay a 30% service fee for all Facebook Credits purchases.
  • 

Whats in store for the Future?

Mark Zuckerberg, the Chief Executive Officer of Facebook, has said that the company plans to do “a lot more” with Facebook Credits.

  1. One option is of developing it into a system for micropayments open to any type of application on Facebook.
  2. Thus Facebook Credits can be applied towards other online media products, or non-gaming digital goods, such as pay-per-view movies, TV, music, and news articles.
  3. Facebook Credits can eventually become a payment method outside of Facebook, usable for purchase of virtual goods on other platforms.
  4. Facebook will provide users with free Facebook Credits to watch advertisements for which third parties pay Facebook

Thus the future seems to all virtual. This is really astonishing where someone has created a virtual currency & virtual goods & virtual games, and real people are using real money to buy them to have real fun.

Is there anything you have to say about this?