Backup Plans
June 20, 2016
UL0010 – The VC Trap
March 31, 2012

Putting in Your Money and Starting

This week we look at what it takes for an entrepreneur to gain a venture capitalist (VCs) confidence to invest in a start-up business and how other investors can be influenced through self-financing a business.

One factor crucial to the success of a business in terms of investments is making the right financial moves. Only the entrepreneur is fully aware of the scope of the project, the chances it has at capturing the market and the opportunities it can bring about for all the parties involved.

However, explaining the true nature of your project to investors may become an obstacle on your road to initiating a new project. Once a business plan is formulated, the next step is to convince others to join you by allowing them to understand the potential your project or idea has. A feasible way to assure this is to invest into your own business. Individuals who want to invest in start-up businesses are hard to find and they are well aware of all the risks that are involved.

At this point, it is important to realize that venture capitalists evaluate your chances at success by determining if other investors have funded you or not. This implies that unless and until a company is already funded by someone or has a foolproof idea or technology, Venture Capitalists avoid funding it. This is where the idea of self financing comes into the big picture.

The finances for most of the start up businesses come from the entrepreneur’s own pocket. At such trying times, friends, family and relatives prove to be the ultimate source for early stage funding, in addition to all the self funding a project can get. These are the people who show their confidence in your idea when all others seem completely indifferent to it.

People often refer to these early stage investors as fools. This is because, there is a considerable amount of risk involved in every start-up business and chances that your efforts may not pay off are even higher. Knowing all the risks, if you are still putting your money at stake, people believe that it will only be justified to term these investors as fools who are happy to see their money going down the drain.

One other type of financer that an entrepreneur comes across these days is the angel investor and they are one of those very few individuals who invest in projects in their initial stages. These are affluent, high-profile people who wish to multiply their income by helping start up businesses through early investments. They are well aware of the risk factor that is involved and they actually do not mind losing their money because they know that if a business strikes gold, they will be the ones making huge profits through it.

Wondering how angel investors determine if they should invest in a business or not? They find out how much YOU HAVE invested into the project. The higher the amount you have invested, the more it will pain you to lose it. The equation is quite simple. If you are not willing to risk your money with something, why should they? Some venture capitalists assess what you have to lose in case the business fails and so they actually determine an entrepreneur’s pain factor to find out if the investment they are making is worth it.

On a final thought, it is important for entrepreneurs to realize that they have to put their own money in order to set up a business as this investment will not only help attract other investors but will also earn their idea or business credibility that they have been seeking all along.

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