Startup Funding Explained: Everything You Need to Know

Summary

The video script narrates the exciting journey of starting a company from a visionary concept to a successful enterprise. It begins with two friends turning an idea into a company, facing the initial costs of incorporation and legal structure. They secure seed investment from family and friends, valuing their enterprise at $250,000. As the company grows, they conduct a Series A funding round, attracting investments from angel investors and venture capitalists (VCs), leading to further dilution of shares. The script explains the process of capital raises, stock splits, and the eventual exit strategy through an IPO, where the company's shares are sold to the public. The founders, despite being diluted, see their personal wealth skyrocket, yet they view the IPO not as an end but as a new beginning, with much achieved and more to do.

Takeaways

• 🚀 **Starting a Business**: It begins with a unique vision that leads to designing a logo, name, and concept for a product or service that hasn't been done before.
• 🤝 **Partnership**: Often, two friends with shared excitement form the core team to start the venture.
• 💼 **Legal Structure**: To establish a company, a legal structure is necessary which involves costs ranging from $25 to several thousand dollars in the US.
• 💰 **Seed Funding**: Early investment, known as seed funding, typically comes from family, friends, or crowdsourcing, with shares allocated based on the investment made.
• 📈 **Valuation**: The value of a startup is determined at different stages, with seed investment setting an initial value and subsequent investments adjusting the valuation.
• 📊 **Series A Funding**: After the seed round, startups often seek a Series A round of funding, targeting larger investments from angel investors and venture capitalists (VCs).
• 🤔 **Investor Due Diligence**: Investors assess the competence of the team, the uniqueness of the idea, and the potential achievements of the startup before deciding to invest.
• 💬 **Negotiation**: The negotiation of post-money valuation is crucial as it determines the share of the company the investors will receive for their investment.
• 📝 **Smart Money**: Sometimes, the decision to accept investment is not just based on the amount but also on the value-added by the investor, such as industry connections.
• 📌 **Dilution**: With each round of funding, the original founders' and early investors' share of the company is diluted as new shares are issued to new investors.
• 📈 **Capital Raise**: The process of issuing new shares to receive cash is known as a capital raise, which can occur in multiple rounds (Series B, C, D, etc.) as the company grows.
• 🎉 **Exit Strategy**: The ultimate goal for investors is an exit, which can be through selling the company to a larger entity or going public via an Initial Public Offering (IPO).
• 💼 **Vesting**: In the event of an acquisition, shares are often transformed into shares of the buying company and made available to employees over time, a process known as vesting.
• 📋 **IPO**: An IPO is a significant capital raise where the company issues new shares to the public, allowing anyone to buy and sell them on the stock market.

Q & A

What is the initial step in starting a company?

The initial step in starting a company involves having a vision for the project, product, or service that is unique and has not been done before.

What are the costs associated with incorporating a company in the US?

The costs of incorporating a company in the US can range from $25 to several thousand dollars, which includes registration fees that vary by location and legal fees.

How many shares does a newly operated company typically issue?

A newly operated company typically issues 100,000 shares, which are equal pieces of ownership.

What is the term used for an investment made at the early stage of a startup?

An investment made at the early stage of a startup is called a seed investment.

What is the difference between a venture capitalist (VC) and an angel investor?

A venture capitalist (VC) is a person who works for a firm that raises and invests venture capital funds into young, risky companies. An angel investor is an individual who professionally invests their own money into startups, often having sold their own startup in the past.

What is the term used for the first big round of cash collection after a seed round?

The first big round of cash collection after a seed round is called a Series A round.

What are the two main ways of exiting a company?

The two main ways of exiting a company are selling it to a larger company or offering it on the stock market through an Initial Public Offering (IPO).

What is the process called when a company issues new shares to receive cash?

The process of a company issuing new shares to receive cash is called a capital raise.

What is the term used to describe the period during which company insiders are restricted from selling their shares after an IPO?

The term used to describe the period during which company insiders are restricted from selling their shares after an IPO is called the IPO lockup period.

What is the term 'vesting' in the context of company shares?

Vesting refers to the process where shares are transformed into shares of the buying company and made available to employees over time, often contingent on them staying with the company and meeting certain milestones.

How does the process of stock splits affect the number of shares a shareholder has?

Stock splits increase the number of shares a shareholder has by converting each single share into multiple shares, thus increasing the total number of shares outstanding.

What is the significance of a company's first profitable quarter?

The first profitable quarter signifies that the company has transitioned from a phase of investment and growth to a phase of sustainability and potential profitability, which is a key milestone for investors considering an exit strategy.