Bob had a brilliant idea and wanted to start a business. What did Bob have to do? Yes, Bob had to find money!
Normally when people need money to start a business, they turn to the bank to present their business plan in the hope they’ll be lucky enough to get a loan. However, we all know that banks are extremely conservative and won’t approve easily. If you tell them, for example, you want to rent out another person’s house for a complete stranger to sleep in (that’s AirBnB), no banker would ever dare to give you a loan!
So, what do people with crazy ideas do? Well, they turn to venture capital.
A venture capital (VC) fund invests in start-up companies. It has been around in the United States for more than 60 years but is still very new to Thailand. Regardless, getting money from VC actually involves many procedures, and founders also have to play by VC rules. So, let’s see if you really need funding from VC.
The fact is, VC-backed start-ups usually grow faster and bigger than bootstrapped or self-funding start-ups in the long run. This is because they have more money for marketing, for hiring talented employees, for better operations, and for smoother and prettier website or mobile application. However, the most important things that you may get from VC are probably worth more than the money itself—they are the connection and the know-how. International VCs may open the door for your business in foreign countries or can connect you to strategic partners who may help expand your business tremendously. The right VC can also help shape a business model or plan strategy if the VC Partners was a successful entrepreneur prior to becoming a venture capitalist.
However, good things always come at a price. In return for VC money, founders of the company must give up part of their ownership to the VC fund. The valuation of the company and the amount of money from the VC fund will determine how many shares need to be given up. After agreeing on valuation and a term sheet is signed, founders and the company enter into the legal agreement with a VC fund and accept basic terms like preemption rights, liquidation preference, information rights, right of first refusal and many more. VC funds have to protect themselves because start-up business is very risky. There might be only one company out of ten that can grow multiple times.
Regardless of the conditions above, notable companies like Uber, Grab, YouTube, Snapchat, DropBox chose to walk this path along with venture capital. They overcame competitors because of the funding, connections, know-how, and management strategies they were given.
If you are not quite ready - or think you are too early - for the world of VC, there are alternative options like joining Accelerator programs, listing the project on crowd-funding websites, or getting funds from Angel Investors instead of VC. If you are ready to explore the world of opportunities, 500 TukTuks is here to provide funding, know-how from Silicon Valley with local touch, mentoring sessions, and strong connections to kick start your start-up.