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New Venture Finance

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[Washington State - Forbes]
 

Don't Compare Yourself To Others.
There's No Comparison To The Sun and The Moon.
They Shine When It's Their Time.

 

 

- Overview

Making a list of initial costs is the first step when you need funds to start a business. Cut any unnecessary or excessive expenses to identify the basic requirements of your startup, and get a realistic idea of how much money to request. Bare-bones estimates minimizes the financial risk lenders and investors must take when extending funding.

There are two types of funding you can pursue:

  • Equity, or selling shares in the company in exchange for capital
  • Debt, which involves an advance of money paid back over time


Each method has its perks and drawbacks, but ultimately, keeping control ensures that you’ll profit the most. 

The AI age is fundamentally reshaping venture finance, creating both new opportunities and challenges for founders and VCs. Navigating this evolving landscape requires a combination of AI-specific knowledge, a focus on sustainable business models, and a willingness to adapt to the changing funding models.

AI will lower the cost of doing a startup, so some good percentage of founders will not need VC money, or will need far less of it, selling less of their companies to VCs. AI will replace many VCs just as AI will replace engineers, SDRs and customer service professionals. 

The right entrepreneurial approach, combined with dedicated AI tools at each stage of development, will minimize human intervention and build successful startups. In this environment, concept innovation will become a key factor in the development of enterprises.

 

- Finding Starup Funding

It's tough finding startup capital to open a small business. Consider following financing methods to determine the best option for getting your business up and running. 

Startup funding for small businesses is particularly elusive - as most traditional business loans require one or more years in business - but that doesn’t mean it’s impossible to get your hands on. 

  • Startup Loans: Loans are the first funding source most entrepreneurs think of when seeking startup funding. If you have a fantastic credit score, a low debt-to-credit ratio and a history of making on-time payments for all your expenses, you might be able to convince a bank to finance your startup. However, keep in mind that it could take weeks or months to find out if you’re approved, and for how much. Online fintech lenders offer startup loans with streamlined application processes. This minimizes the work on your part, as you won’t have to perfect your business plan or sweat over projecting your profits before applying.
  • Business lines of credit: When the funds from a business loan are gone, you have to apply for a new one to get more funding. That’s not so with a line of credit. Startups with big plans for the future can benefit from the way this type of financing “revolves.” Your available credit is replenished each time you pay back what you draw. You only pay interest when there’s an outstanding balance. For this reason, a credit line is often less of a financial burden than a loan.
  • SBA microloans: Government-backed loans from the Small Business Administration (SBA) are available through intermediary lenders in amounts up to $50,000. SBA loans tend to pose a lower risk to lenders than traditional funding.
  • Equipment financing: If you need startup funding to purchase equipment, then consider equipment financing a top option for funding your venture. Equipment financing for startup businesses is particularly apt for your situation because of its self-secured nature. Because the equipment you purchase will act as collateral for the very funding you use to purchase it, equipment loans will be easier to qualify for, even if you don’t have much time in business.
  • Invoice financing: Through invoice financing, you’ll be able to access an advance for a portion of your business’s outstanding invoice value. This form of startup funding will rely on your business already having at least one invoiced customer, but many invoice financing companies will require you to have very little time in business to be eligible for funding. 
  • Venture capital: Startups in industries with significant growth potential may be candidates for venture capital. To get the attention of these investors, your business must stand out from the numerous others requesting funding. Find venture capitalists who share and believe in your vision, and put together a stellar sales pitch to wow those looking for something distinctive to support in 2020. As mentioned above, be sure to consider other options (which allow you to keep control of your profits and company) before selling equity.
  • Angel investors: Other entrepreneurs who have built successful businesses are sometimes willing to invest a significant amount of money to help others get their startups off the ground. In exchange for a share in your company, you get not only funding, but also expert guidance. Many angel investors have a history of helping startups grow. These angel investors expect returns on the funding they put into your startup, so you’ll need to focus your energy on making your business profitable. However, keep in mind that taking on angel investors means forfeiting a portion of your profits. This isn’t something you can easily redeem, so be sure to thoroughly consider this. 
  • Personal savings: Believe it or not, over 90% of startups get going without the aid of outside funding. Intrepid entrepreneurs figure out how to raise funds for a business startup and avoid the hassle of dealing with third parties. Consider selling off possessions you don’t really need, or making strategic investments to boost your available capital. You can also start your business as a small-scale side hustle while working your current job. Over time, you can grow it slowly until it’s big enough to support you.
  • Crowdfunding: Thanks to platforms like Kickstarter and Indiegogo, it’s no longer awkward to ask strangers for money to start your business. In fact, it’s actually quite common. Because crowdfunding through online platforms is becoming more popular, you need a compelling story to convey the “why” of your business to potential backers. Rewards-based crowdfunding sweetens the deal with perks for everyone who supports your efforts. Equity crowdfunding is also an option if you don’t mind sharing stakes in your business. Both require promotional work on your part to get the word out and, and compel potential investors to take the plunge.
  • Friends and Family: If friends and family are on your side, they might be willing to help make it happen. You probably won’t get a ton of startup cash this way, but every little bit helps. Just make sure you lay out the conditions of each offer in writing. Is it a gift, or are you expected to pay back the amount within a given period of time? Even when you know someone well, it’s best to establish repayment schedules as you would for a regular loan to avoid any misunderstandings.

 

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- The Transformation of Venture Capital in the Age of AI

While venture capital firms are actively investing in artificial intelligence (AI) as a transformative technology, evidence suggests that AI may fundamentally disrupt the traditional venture capital model itself.

In the AI age, new venture finance is characterized by a surge in AI-focused startups and a shift in how venture capital (VC) firms approach investing. AI is transforming various aspects of the VC process, from deal sourcing and due diligence to valuation and portfolio management. 

The rise of generative AI (GenAI) is particularly driving increased investment in AI-related ventures, with projections reaching $200 billion by 2025. 

A. Shifting Investment Landscape:

  • Increased AI-focused investments: The number of AI-related startups receiving VC funding has grown significantly, with projections for 2025 indicating substantial growth.
  • New funding models: Emerging funding models like seed-strapping, which focuses on raising one seed round and growing profitably, are gaining traction in the AI-native era.
  • Focus on deep expertise: VC firms are increasingly seeking founders with strong technical backgrounds and a clear understanding of how AI can address specific industry challenges, says an article on Medium.

 

B. AI's Role in the VC Process:

  • AI-powered tools for deal sourcing: VCs are using AI tools to automate manual tasks, streamline deal sourcing, and conduct in-depth research more efficiently.
  • AI-assisted due diligence: AI can help in analyzing data, identifying potential risks, and conducting thorough due diligence on AI-related ventures.
  • Enhanced valuation and portfolio management: AI can assist in evaluating the financial viability of AI-driven businesses and in managing the portfolio to optimize returns.

 

C. Implications for Founders:

  • More funding opportunities: The increasing interest in AI-focused startups creates more opportunities for founders to secure funding.
  • Need for AI expertise: Founders need to demonstrate a clear understanding of AI's capabilities and how it can be applied to their business model.
  • Adapting to the new funding landscape: Founders should be aware of the evolving funding models and adjust their strategies accordingly, notes businessabc.net.

 

D. Key Considerations for VCs:

  • Focus on AI-specific knowledge: VCs with AI-specific knowledge are better equipped to evaluate AI-related ventures and mitigate valuation risks, notes SpringerLink.
  • Understanding competitive dynamics: VCs need to have a deep understanding of the competitive landscape and the evolving regulatory environment in the AI space.
  • Prioritizing ethical and cybersecurity considerations:
  • AI's potential impact on ethics and cybersecurity requires VCs to carefully assess these aspects of AI-related ventures.

 

 - A Structural Transformation

In an AI-enabled environment, the value of human capital will surpass financial capital. This is a stark departure from the traditional venture capital framework. 

AI technologies are empowering entrepreneurs to leverage large language models (LLMs) and other AI tools to turn concepts into products without relying solely on traditional resource-intensive approaches that require large capital investments. 

The impact on venture development is profound. Entrepreneurs can now advance from the ideation stage to product development and market expansion in significantly less time and capital. 

What once took years of development and millions of dollars to accomplish can now be accomplished in just months at a significantly lower cost, effectively creating a phenomenon of “startup deflation.”

Many established venture capitalists currently view AI primarily as an efficiency tool - it can automate business plan screening, speed up due diligence processes, enhance market research capabilities, and speed up document creation. While these views are correct in the short term, they fail to recognize the more transformative potential that AI brings to the venture capital ecosystem. 

AI can significantly reduce the human capital requirements of almost all venture development stages that entrepreneurs have traditionally relied on. With AI support, a small founding team of two or three talented entrepreneurs can effectively run a multi-million dollar tech company. 

This is possible thanks to:

  • AI can transform conceptual ideas into preliminary product designs
  • Designs can be transformed into fully functional software code
  • Websites, mobile apps, and customer support systems can be automatically generated
  • Entrepreneurs mainly need to provide strategic direction, while AI is responsible for execution.
  • Multifaceted, technically proficient, and experienced entrepreneurs will have significant advantages
 

 

 

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