Video: Is investment capital right for you?

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From the course by UNSW Sydney (The University of New South Wales)

How to Validate your Startup Idea

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UNSW Sydney (The University of New South Wales)

How to Validate your Startup Idea

50 ratings

Starting a new business begins with an idea that needs to evolve through experimentation, iteration and interactions with people. This course is for existing and potential entrepreneurs who are looking for guidance and support to make their ‘great idea’ a reality. In addition to reviewing the basic principles of entrepreneurship, this course guides you through the process of actively validating your idea in the market. We encourage you to identify and communicate good opportunities and to create and capture value from these opportunities. By working through the course and completing the activities you’ll learn how to get feedback that systematically tests different parts of your business idea. You will learn how to do this through interacting with potential customers, suppliers, partners and investors outside the course. Along the way, you will also become more confident in pitching your idea. By the end of the course you should have a validated business idea that you can start right away.

From the lesson

Is investment capital right for you?

This week you'll learn some basic investment capital strategies for new ventures, illustrated using a simple capitalization table.

Video: Is investment capital right for you?3:40

Meet the Instructors

Allya Koesoema
Lecturer
UNSW Business School
Martin Bliemel
Senior Lecturer
UNSW Business School

In this module, you will learn some basic investment capital strategies for

new ventures, as explained through a capitalization table.

The capitalization table summarizes the percentage of ownership and

its value over time.

While most ventures grow organically from revenues or

bootstrapping, investor capital can accelerate that growth.

Scaling and

accelerating a business makes sense if the profit margins improve with scale.

>> When considering asking for investment capital in exchange for

equity, it is important to keep in mind that investors are interested

in reselling their equity for multiple times their investments.

There are also different types of investors, and

each have their own way of deciding how to invest.

Early stage investors typically invest 10 to $ 500,000 of their personal money,

for a relatively small percentage of equity.

They also typically invest in you as a person, knowing that

most other aspects of your business are high risk and can change on short notice.

>> Early stage investors also include accelerators, which simultaneously invest

in a cohort of startups offering the same cash equity deal, shared office space,

structured workshops and mentorships to the startups.

Later stage investors, or venture capitalists, or VCs, typically invest

upwards of $5 million in exchange for a moderate percentage of equity.

They usually want to see an advanced prototype, evidence of a product market

fit, traction or other signs that there are moderate levels of risk.

>> Capitalization tables summarizes who owns how much equity and

the respective value of that equity, and

are useful in strategizing how and when to raise capital.

These tables can also be visualized as pie charts.

To illustrate two strategies, let's start by imagining the same company

with an initial evaluation of $950,000, all 100% by the entrepreneur.

In both strategies, the entrepreneur raises a total of 5.5 million.

>> In the first strategy, the entrepreneur is able to attract a single round of

venture capital investment worth $5.5 million.

In exchange, the VC owns 85% of the equity.

In the second strategy, the entrepreneur first completes an accelerator program

which invests $50,000 for 5% equity.

Then upon completing the accelerator,

the entrepreneur raises $500,000 in seed funding for 20% equity.

For their third round, they go for the venture capital investment and

raise $5 million for 29% equity.

>> In the first scenario,

there is only one large round of funding, which enables the entrepreneur

to focus on business development and take a break from chasing investors.

However, this approach would require a fairly convincing pitch

with little traction and the entrepreneur becomes a minority shareholder.

The entrepreneur might also be committed to pursuing an IPO (initial public offering) in order for

the VC to actually make their returns.

>> In the second scenario the entrepreneur spends more time and

effort raising capital in multiple rounds.

However, they retain a much larger percentage of equity.

This is because they can reach the intermediate milestones and

create value in between those rounds.

>> Now that we have identified some basic financing strategies,

your key activity for this module is to interact with a potential investor

to validate its attractiveness to them as a potential investment opportunity.

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