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FAST CLASS: Fund Your Business for Growth

Lesson 11 of 18

Achieve Big Dream With Investor Cash

Susan Schreter

FAST CLASS: Fund Your Business for Growth

Susan Schreter

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Lesson Info

11. Achieve Big Dream With Investor Cash

Lesson Info

Achieve Big Dream With Investor Cash

But it's never one kind of financing that will power your company from start up to expansion. And even up until the time you sell your company, it's usually a mix of a little bit of debt and perhaps a little bit of equity. It's all about the timing of when you boost your business and power it up with extra cash to fuel growth. This is the hot topic investors. I love it because they, as I just said, can write big, big checks. So you're bigger dreams can become possible equity capital. What are we really diving into? And what are the things that I know are most on your own mind? It's actually bullet point # three. Usually we don't have the confidence in ourselves or we worry, well, maybe our business really isn't, you know, that worth it for investors to come in. And I'm saying here have confidence in yourself, I believe in you, I believe in your capabilities. Don't let that issue. Your own mindset be the reason that you don't explore and take those steps forward. You might get a yes, yo...

u probably will get a yes, especially if you follow some of the action steps and information that we're going to be covering in the segments um, coming up, would you rather own here is a great question for our audience and for everyone here, A business that generates $1 million dollars in annual revenues Or a business that is worth $1 million. Okay. It's actually a trick question. It's not as black or white as that, It is possible. And I've worked on projects with companies as much as $30 million dollars in revenues a distributor business and I was brought in to help turn around, That company wasn't even worth $500,000. Other things matter more in creating business value. You can also have a business with absolutely no revenues and no customers, no customers, no revenues and not even a finished product happens all the time in the biotech community, Right? But that company could be worth millions of dollars. So it says to you, it's not just about revenues that creates business value, some other characteristics of your business plus, where you want to go influencing influences what investors are willing to write checks for and ultimately what boosts the value of our business. So that someday in the future somebody writes you an eye popping monster, big check to buy your business. What is equity? A lot of times people think investors, but I use the word equity a lot. Now. It's a tricky word because it matters so much on the context. It's being used for most of these sessions. We're gonna be talking about your company and it's worth the equity value of your business, their accounting terms related to it. It could be assets minus liabilities, these equals net worth. But even that, that rigorous statement doesn't necessarily, you can have a company with a net worth of, again, for accounting and financial terms of say a million. But actually investors are valuing that business at much, much higher rates. We're also going to be talking about the equity value of the business and your own ownership of it. That's what equity means, what you own and what it's worth. Here's another way to think about value. This is kind of like the dream here. I love it when you don't invest too much of your own cash and your own savings in a business. But over time that equity value what your company is worth grows doubles, triples quadruples over time. And unfortunately, I work with business owners that may have worked in their businesses for 10, 15, 20 years and they assume just because they were working at it that long or have put in a lot of dollars into that business that it always will be worth that. And it's a sobering thing when they say no, when they're ready to sell that business, it's not worth what they think it should be worth. And what do I hear at that moment? I wish I had known, I wish I had known you back then when I started the company, I wish I had known better startups and prospering businesses in the United States have and generate on average networks that are three times their salary, counterparts, prosperous business owners, especially women and minorities, earn higher average annual incomes. How does this possible? And it comes from equity. Usually equity has the potential to create millionaires and billionaires. Should that be your only goal in life? No. You know it's great to start a business with $5,000 and make it worth 500,000. That is uber success. But it does have this potential to create millionaires and billionaires and you can do it equity. The U. S. Tax code makes it even easier for you to become a millionaire or billionaire through business ownership. Why remember that slide with the growing amounts of dollars? Well if you have an equity stake in the business that can grow over time unless you're taking out dividends for the most part, you don't have to pay income taxes on that growing value of your business up until the time you sell it, wow. That is one terrific way to build your net worth. And the capital gain is about half the rate. As ordinary income, half the rate. So if you're making a big big salary you may be paying 39 on that salary. God bless you. That's great. That's a great accomplishment. But through business ownership, the U. S. Tax code favors business owners Because the capital gains tax rate which just was raised at the top rate is only 20%. So you get a bigger bang for the investment and the hard work in building the value of your business. Okay let's start thinking about who investors are. They're not all the same. And this is the starting point of frustration. Most people will go to one investor and get to know. But we're shoppers and it's good shopping is really targeting what you want to, what investors love, what they love to write checks for. So at the start up stage the most, most companies may get an equity investment from your own savings and maybe your friends and family members and as your company and your ideas progress a little bit to the seed stage. Who's your best funny match at that level? Angel investors, which are just wealthy individuals seed stage venture capital funds a little bit, We're going to be talking about which venture capital funds across the United States love to invest in. Just start up companies, young young companies. As your company progressives gets more customers completes product development, there's a different crowd of venture capital funds that just love that They want a little bit of more proof that your product works or customers love you. They're also willing to write bigger checks per round, Roughly $3 million, $20 million dollars per round. They may invest with other venture capital funds that again love to invest in early stage companies. And then as we grow further, There's another crop of investors world. I come out of private equity funds that made by 100 of your business, We're 30 of your business. And a lot of these funds want to keep you involved in that business, but they're going to give you even more firepower in their cash to build even bigger. Those are called private equity funds. Sometimes they're called expansion stage venture capital funds and corporations, sometimes your best funding fit is a company where you represent strategic value, shared strategic value. And I would say coming out of the recession, I'm seeing more corporations investing in earlier stage companies because after years of cutting, cutting, cutting jobs, cutting expenses there. Now, at the point of, oh my gosh, we've now got to grow, what are we going to do next? And corporations recognize who are the inventors, who are the innovators, who are the creative people that can also build products faster, get things to market its entrepreneurial companies. If somebody only invests in expansion stage companies and you're over here, you don't ask them for money, Don't bother to send them a business plan. But it happens all the time. Most knows in angel investment clubs or venture capital funds start out and you can tell from the first page of your executive summary that you were not a good funding fit. So why do people keep sending, you know, their plan, their idea, their concept to the wrong group. Usually they know it, but they think they're opportunity is so cool, so revolutionary that the funds will make an exception. Uh, still, I know they have the money and I'm going to make money for you. You'll make an exception. Yeah, I'm over here, but I'm worth it. Well, here's the thing. They can't change what they're allowed to invest them because they have their own investors. So when funds, venture capital funds are created, they have to tell their own investors the profile of how they're going to use their cash and they will lose their jobs if they do too much or any of those exceptions, they will fire me control my business. One thing we didn't hit usually get, they will steal my ideas and run off and do it without me. They won't give me more money when I want more money. I'm gonna give everybody a big teaser in an upcoming segment. I'm gonna give everybody the strategies on how to maintain control. Even if You sell off 51 of your business. It's not now you got to stay with us. I hadn't hear enough about this. They are greedy people, greedy, nasty people. All they care about is making lots of money. Now we do live in a capitalist country right? We revere that. But greedy. I'm not greedy because I want to build the value of my business. But they're greedy because they want to build the value of their cash. Okay let's see what greedy really means. What do investors expect to make on their money? The rate of return? We're getting into the meat early in these segments. The really fun stuff investors will say what we ask for is a function of risk and reward and I'm sure everybody's heard that. But what does it really mean in dollar terms? And what does the investor especially individual investors? What choices do they have with deploying their money now? Generally lower risk investments are just putting money in A. C. D. Very low rates of return these days minuscule rates of return. Lowest low interest rate environment but low risk F. D. I. C. Insured bank accounts. You're not making much but you're pretty much guaranteed that you're not gonna lose all your principal or even part of your principal. You move up the kind of food chain, Treasury notes, T. Bills and so forth. General again low interest rate environment for partially tax free instrument. 1.7 to 2.8 I updated this a couple of days ago, publicly traded stocks relatively safe. Most you know a good portion of the standard and Poor's 500. A basket of 500 large capitalization stocks Historically over the last decades typically returns between six and 11%. It's moving up the risk level because you can lose your principal, you might earn a little bit of dividends but there is more risk but there's a greater reward Now in the last two years, the S&P 500 has been awesome. You have money in an S. And P. Mutual fund and you made over 30% on your money last year smoking here couple years ago, you lost capital, right. same thing with other indices, like the Wilshire 3000 or other indices that usually include smaller companies. They're all publicly traded the advantage of being of putting your money in a publicly traded company. You were called privately held companies. Private investors own the entity, which means asking angels and VCS to invest in your company. And you could even do it through crowdfunding sites, which we're going to spend some time on later. It means when they want their cash back, They can't necessarily call you up and say, Hey, by the way, I want my 50,000 back Because chances are you're not going to have $50,000 back to get back to your investors. And the real deal in America for the Lion's share of privately held companies, highly entrepreneurial companies is you won't get your money back and your investors won't get their money back until you sell your company to another company. Usually a larger company, you may go public, but you're probably gonna sell to somebody else. And the great thing about investors who love this space is they're willing to give you time. They know it's an illiquid investment, But we're going to give you 5-7 years to return the capital. You've got a lot of leeway to perform. But for that illiquidity, it's higher risk to them. They want to be compensated for that risk. And there's higher risk investing in companies that may not yet have, customers may not yet have products. So you are different than putting investors putting cash in apple stock should they be compensated for that extra risk? If they're not, they're not very smart investors. So private equity, we're going to be going into more of the numbers in general. They're expecting a minimum return of 30 to 40 to compensate them for illiquidity high risk. And let's face it, a lot of companies do tank that's the cost of their capital. No, if you invest $1,000 in your business, you are a investor. You're just like them think like them. It will change the strategies on how you choose what products your customers and how you build that value of your business. You are a business investor. Think like one when you start to think like a business investor the earlier you start doing it. What I've observed in eight years of research of why startups, including start ups that have been funded by venture capital funds and angel investment clubs. When entrepreneurs think like investors earlier in the game, they tend to do better.

Class Description

Ready to master the principles of business funding without frustration? Join financial expert Susan Schreter for a deep dive into debt and equity.

Susan covers everything you need to know to fund a business from inception onward. You’ll learn about how to safely borrow start-up funds from friends and family, and how to research and apply for loans, including micro-loans and SBA loans. You’ll also learn about a wide variety of funding types and the requirements or restrictions attached to each of them. From angel investments to venture capital to crowdsourcing, Susan demystifies potentially confusing funding concepts, giving you the skills you need to confidently grow your business.

Whether you’re just setting out as an entrepreneur or a long-time business owner, this course will help you ensure your business's long-term financial health and profitability of your business.

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