How difficult is it to get funding for a big business idea?
Two of my friends want to start an international company based in the USA which will require a couple of million dollars to start.
To give you a brief background about them, they’re both Ivy League graduates – very smart people. Both of them make nice six-figure salaries working for big organizations. However, they’ve never started a business before, never ran a multimillion dollar entity nor do they have a lot of business collateral. They haven’t done anything to start the business yet and have no track record of it being profitable (or successful). But, their business plan is rock solid and really good. They have already assembled a terrific team that will help them with their endeavor.
So, what do you think are their chances of receiving funds for their business idea?
July 19th, 2010 at 4:31 pm
Not real high, but they might find a venture capitalist or two who might go for it if their credentials and business plan are very solid. Two million is a lot of money, and if neither ran a business before, and neither ran an entity that large, would be difficult to get the funding. They might have to take a funder in as a third partner, or turn over large amounts of control to funders.
July 19th, 2010 at 5:12 pm
There are two ways to get money for a business: debt and equity (there are others, but they boil down to the same two).
Debt is a loan – secured against something. Your mates might be able to raise a significant amount of money if they have good 6 figure salaries. If they can second mortgage an expensive property, for example. Another route to debt is to borrow money from friends and family. Obviously this isn’t a huge goer, but if they have wealthy friends it might add a few hundred thousand or so. The amount of debt you can raise for a start-up depends largely on your personal assets and what you’ll spend it on (it is easier to borrow $1m if you’re going to spend it on $1m of kit that can then be sold later to recover the money – its the same principle behind banks offering you a mortgage, they know that if you can’t pay it, the house gets sold and they get their money back).
Equity involves selling some of the company for money. Buyers take part of the company in the expectation that they’ll be able to sell it again later and make a profit, or else that the company will issue its profits in dividends, and they can benefit from those. Equity depends on the value of the company in the medium term (not, normally, the long term). It is pretty hard to value a company more than a few million dollars when it is just an idea, particularly as the management team aren’t proven. I’d say your friends would be lucky to raise $2m without giving most of the company away.
But a combination might work. If they believe 100% in the idea, and are willing to get the debt for, say $1m, it shouldn’t be beyond the realms to find an investor or consortium to come in for the other $1m.
July 19th, 2010 at 5:12 pm
You save it, that’s how you do it.
1-2m with a combined income of what, 250k / year shouldn’t be a problem, unless someone forgot how to tie their shoelaces…
July 19th, 2010 at 5:38 pm
Chances for receiving funding based on the information you provided would be low. First of all VCs don’t care which college you graduated from. They do care that you have some level of experience and know how in setting up a business. How can 2 people who make 6 figure incomes not have collateral? This shows a complete lack of money management skills. If someone approached me for a multi-million dollar and couldn’t even manage their own finances, I would RUN, not walk away from their idea. Also, why does their business need millions just to get started. Are they building airplanes or cars? Very few industries require that kind of money for initial start-up. They may need this money to support growth, but unless they are opening a large manufacturing plant, they don’t need it just to start the company. Here are some links that may help.
July 19th, 2010 at 6:07 pm
Have they considered tailoring their plan so they can get a government grant?