HOW TO FINANCE YOUR NEW STARTUP

2 March 2023

1. HOW TO FINANCE YOUR NEW STARTUP

2.CHECKLIST - SHOULD I INVEST IN A STARTUP?

1. HOW TO FINANCE YOUR NEW STARTUP

So you've got this great idea for a new startup but unfortunately you haven't got any customers because they don't know about the product or service you're selling and anyway you don't have a workshop or offices because you can't afford it ... what do you do?

Let's take the example of a company called Resi which is based in Brixton and will rehab your house for a fee and maybe even run the builders.

Resi's founders know there's a huge demand out there, but unfortunately that demand doesn't know about them! And anyway, where can they locate their staff and how can they take on a lease on a building when they have no track record of income or no startup capital enough to convince a landlord they can pay the rent ?

We will talk about two things here in this case that will solve Resi's problem:

-advertising inventory

-convertible loan notes.

Resi can borrow money to build its business - take out a bank loan, or issue bonds (a bond is a loan, but you can sell it on) ; or it can sell shares in its to-be-created new company. The company may exist, and even have some money - "retained earnings" - but not enough to get going.

It wants the money to build a bigger business to sell more!

There's this clever way for a start-up which has no credibility and finds it difficult to borrow money. It's called a Convertible Loan Note or convertible debt. All it is, is just an agreement with an investor to lend the startup money and the debt, or the debt-plus-interest, builds up, and at a later date this debt can be converted into shares in the company, once the revenue starts rolling in and everyone can agree the value of the company.

ITV has said they will lend Resi money, but they want Resi to use some of that money to buy advertising on ITV. That's the deal.

What is it that Resi will buy from ITV? They will buy "advertising inventory". Now what in the world is advertising inventory? It's the amount of space that the publisher - in this case ITV - has to sell. It's all its space, beit on a printed page, or a page on a website, or air time on radio or TV (linear or streaming).

Working out how much advertising costs - how much inventory Resi will need to get its customers and at what cost -  is quite complicated, but you can imagine that the important things to valuing the advertising inventory are how many users view the advert, how many click on the advert, how many fill out a form ... that kind of thing. So you can calculate how much revenue the advertiser, Resi, can expect to generate from the advertising that the publisher, ITV, sells....and so value the inventory.

It pays for the advertising from the loan, but the loan will be on very favourable terms as Resi has promised to buy advertising from ITV with it, or some of it.

So in summary, the company Resi wants to grow fast. It needs capital to start up. It buys advertising inventory from ITV using money that ITV has loaned it, in the form of a convertible loan that at some point, under agreed terms, ITV can convert into shares in the company.

For more info on Resi's idea:

https://resi.co.uk/about

https://www.itvmedia.co.uk/new-to-tv/itvadventures/itv-adventures-invest

They are located in Brixton:

020 8068 4811

https://maps.app.goo.gl/nsLpnqa4g5GhzYmm6

https://m.marketscreener.com/quote/stock/ITV-PLC-4004488/news/ITV-invests-in-architectural-technology-company-Resi-Design-43120156/

27 April 2023

2. CHECKLIST - SHOULD I INVEST IN A STARTUP?

Funding rounds, seed capital

We looked at the products and its competitors

- functions, cf with peers, place in industry, sector

We parsed the marketing and legal comm

- defining terms, taking out emotional appeals, logic, rhetoric

We examined the accoumts and some ratios

- price to sales, prospective earnings, runway, return on capital employed

We cobsidered your portfolio, your investmet strategy and some measures 

- risk/reward, relative weighting, diversification

We did what we could with the time and data available. And made a reasoned decision.

What do you think?

Run through that checklist above and write down your argument on each of the measures...as far as possible.

You wear two hats: you are the fund manager for your portfolio; you are also the customer.

So, write to your customer (who is also you!) a note explaining the action you take.

Pretty soon, you'll have quite a history - a reort each time you buy or sell, with the data on various measures that is driving your decision.

This is how to learn.