“If you can’t explain it simply, you don’t understand it…” -Albert Einstein
I’ve been an entrepreneur for about eight years now and over those years I’ve heard many folks using language about funding that I am not sure is 100% correct and used properly. I believe that our ability to clearly communicate what we need must be based on what we know; if I don’t know what I need, how can I ask for it?
I recently saw a tweet from a follower that made me do a head tilt: “SEEKING venture capital of ~$2k ….. stats:15k abs uniq visits/mo #investment”
The question that immediately popped into my mind was, “Is $2K considered ‘venture capital’?” So, I did what any other curious entrepreneur would do, I Googled venture funding and what I revealed made a lot of sense.” The following are some terms that I believe every entrepreneur should really understand:
Friends, Family and Fools (FFF)
- Early Stage (1st, 2nd) aka Series A, B, C, etc.
- Later Stage (3rd, Mezzanine)
THE BIG IDEA
The journey begins with that awesome idea, being written on the backs of napkins, envelopes or some scrap piece of paper. Maybe it’s being typed on an iPad, MacBook or recorded on a voice memo on an iPhone. That idea is communicated to friends and others decides to join on the journey. It is determined that in order to get this grand idea to market, money will be needed. From my experience, the majority of entrepreneurs I know, started off by getting Seed Money. This would be money that comes from Friends, Family and Fools (FFF). Parents, Grandparents, that wealthy uncle or that well off friend who believes in the idea enough that they laydown hundreds to thousands of dollars.
TESTING THE IDEA
The wheels are now in motion and computers and hosting are bought, websites are being built, and Kinkos runs in progress. Now it appears this idea really have legs and can run, more funds are needed to really take this idea to the next level and Angels fly in to save the day with hundreds of thousands of dollars.
THE NEXT LEVEL
Now the engine is really turning and the ship is steaming ahead. But, it’s determined that there is not enough room on the ship to hold all the folks (Market) who want to enjoy the idea and a bigger ship is needed; this requires MORE money. It’s time to bring in the big guns – Venture Capitalist (VC).
In order to get the idea to market, hundreds of thousands to millions of dollars are needed and VC’s are the ones who are looking for those high potential, high risk growth start up companies to invest in; they are interested in a return on their investment. There are normally several levels of funding at this point: 1st, 2nd, 3rd, and Mezzanine. If your idea reaches this level many options are available including possible Initial Public Offering (IPO). If things continue to go well, secondary offerings are considered as well.
While this is ridiculously simplified, I hope this sheds some light on the type of funding that exist for startups and how to communicate what it is you are looking for. I’ve heard the term venture capital being tossed around a bit lightly. If you are seriously looking for VC funding, I’d be willing to bet the idea is much further than just a napkin.
Paul McNeal is a Business Coach and Mentor with Teen Business Forum. To learn more check out about.me/paulmcneal.