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Starting up, even where angels fear to tread
With carefully taken steps and a clear business strategy, start-ups can embark on a venture that grows their business
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With carefully taken steps and a clear business strategy, start-ups can embark on a venture that grows their business.
When an entrepreneur starts a new business, he or she needs a considerable amount of capital to get it off the ground. The capital is needed to rent or buy space for the business, get equipment and hire employees.
There are several avenues that entrepreneurs can explore to obtain funding to finance a new business.
According to investment practitioner Yuma Maris: 'The first alternative is personal savings; you can fund the start-up yourself from savings or by taking out a second mortgage on your home.'
'However, this option has some leverage limitations' he added.
Another option is 'bootstrapping'. 'With a very small investment, you get the business going and then use the profits from each sale to grow the business,' Yuma explained.
Experts advise that this approach works well in the service industry, where start-up expenses are sometimes low and there is no initial need for employees.
A third option, which is popular among entrepreneurs, is getting a bank loan.
But what are the requirements?
Banks' start-up financing
Dwiana Septafianty, a corporate banker with a major bank, explained: 'For a start-up company, the bank requires the company to have been operating for at least three years.'
So, what if a company is younger than three years old?
'In this case, the company in question needs to be part of a business group that meets the bank's requirements. Also, a corporate guarantee from the business group will be required to apply for the loan,' she added.
Some banks affiliated with strategic clients may allow special arrangements for start-ups.
There is a special facility for companies that are business partners with banks' strategic clients, typically blue chip companies. 'As long as the company has been operating for at least one year, the bank may consider the loan application, providing the strategic client provides an official recommendation letter', said another banker who spoke on condition of anonymity.
Venture capital
Many experts agree that personal savings, bootstrapping and bank loans have their limitations unless the entrepreneur is already wealthy.
So, a fourth option to get the funding to start a business is venture capital.
'With venture capital, entrepreneurs can sometimes obtain a sizeable amount of money to help finance big start-up expenses or businesses that want to grow very quickly,' said a start-up business owner.
'The founders of a company must create a business plan that shows what they propose to do and what they believe will materialize over a defined period of time [how fast it will grow, how much money it will make and so on],' he explained
The prospective investors look at the plan. If they like what they see, they invest money in the company.
However, according to some reports, many start-ups in Indonesia are not ready to be introduced to venture capitalists as they are still in the early stages of development.
'In Indonesia, investment from venture capitalists averages at between US$1 million and $5 million per company,' said one investor.
Saved by an angel
This is where another type of investor comes in: One who typically invests in companies at an earlier stage than venture capitalists - experts call them 'angel investors'.
Reports indicate that angel investors are high net-worth individuals whose net worth, excluding the value of their homes, is around $1 million or more, or those who earn a minimum of $200,000 per year ($300,000 for a married couple) with an expectation that this income level will continue into the future.
But even angels are not for every start-up.
'Angels differ from friends and family, who typically invest very early, when all you've got is an idea and they invest in you rather than in your company,' said Edwin Ridwan, a start-up investor.
'We only fund the last stage of technical development and early market entry' the 43-year-old said.
According to experts, individuals who become angels typically invest between $25,000 and $100,000 of their own money. It is also reported, however, that there are cases where angel groups create a syndicate of several angels to make a single investment that may average $750,000 or more.
'In Indonesia, the owners of several electronics companies have started to take on a role as angel investors. There are also successful start-up owners that are reinvesting some of their profits as angels,' Edwin added.
Basic advice
Although it is known that angel investors typically invest earlier than venture capitalists, they don't like to invest in anything that's just an idea.
'So, the entrepreneur starts with friends and family to finance the early stage of the company up to where there is some feasibly [in the form of] a prototype or beta version of the product' Edwin explained.
According to another start-up owner, a major point that needs to be determined when an investor invests money in a start-up is the issue of control. 'How much of a company's share should the investment firm get in return for the money it invests?'
This is a critical issue because the role of a founder is just as important as the owner's original idea.
Investors believe that a solid sense of belonging is necessary, but it is something that founders often forget in many start-up deals.
'There have been cases where the founder's ownership decreases and he becomes demotivated to develop the product further,' Edwin said.
Although investing is primarily about money, many experts suggest that when seeking an investor, entrepreneurs should not only focus on the financial aspects.
'In many cases, an investment firm can offer more than just money', said one start-up owner.
'They might have good contacts in the industry, or they might have a lot of experience and so be able to provide valuable advice to a new company,' he added.
Investing in start-ups is nothing new. Start-up investors have been around since Christopher Columbus convinced Queen Isabella I of Spain to fund his voyage to the New World.
With a good launch strategy and sound advice, an investor can help start-ups turn a risky venture into a rich voyage of discovery. (Achmad Istamar)
