In my attempts to engage in angel financing, I have seen the typical concerns that potential angel investors have. Many of these have to do with the investment parameters, and figuring out how investors can get their money back (or returns) – especially given the inherent immaturity of these businesses in being able to outline an exit potential. Investment then gets limited to businesses where investors perceive a high probability of creating a breakout business. Many other diamonds remain in the rough. I have been thinking of ways of addressing this issue so that seed financing is available to a larger base of startups. This should allow for great businesses to “emerge” rather than being “envisioned”.
To start, I am sharing some thoughts on a potential investment structure that should allow this to happen. There are several other elements to making this successful, besides the investment structure, and I will talk about some of those over next few weeks. In the meanwhile, comments and critiques are welcome on this – both from entrepreneurs and angel investors!
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I would not take this route if I had another option, but otherwise, some money with terms is better than no money at all.
Rajesh – nice acid test. Let me put it this way – if I had a better option, I wouldnt – end of the day, its the market which prices deals. In my first venture, we gave away 50% of our company in the angel round. Would I do it today? Probably not. Would I redo it in the same circumstances? Yes.
Alok, Let me ask you a question: Will you agree to these terms as an entrepreneur? If yes, then we have a nice alternate structure for angel investing that can be useful in certain cases.
Krish, also “relationship” falls under this category you mention “Unless the borrower has a steady cash flow from repeat business customers” – the business I know had about 1 year of steady cash flow, but the business was from abroad, so no “verifiable credit standing” etc.
ALso, to buy assets – with those assets as security – institutions like KSFC offer entrepreneurs loans for 50-80% of the asset cost. Assets = land, machinery or stuff.
And there’s free stuff. Companies like Intel have even offered hardware at much reduced or no cost if you do something specific to their hardware, and Microsoft has an early entrepreneur program for ISVs.
But most of this cost reduction is only available AFTER You start up, and opportunities open up only then. So it won’t be usable in a business plan 🙂
Krish,
Debt of any kind is either first or second charge on assets anyhow so in that sense it is secured against assets of the company; but what I mean by unsecured is that it is not secured against any particular asset (a property/car etc.). The person I speak about did not give any personal guarantee either.
My point is: Startups can use relationships to build this kind of financing also – banks do provide it. It will take time of course, but unlike most private banks, PSBs give individual branches some leeway in lending/advances. And if they ask for a charge on (unnamed) company assets in case of default that is the standard concept of debt; we do that for even our personal loans (i.e. if we default, the bank has the right to recover it from anything else we own with due court process)
“Unsecured” is “with recourse” in this case; I don’t know any lending institution that would lend without recourse and without security, has to be one or two, or both.