S2E11: Starting From Zero -

Getting the Money Started As An Entrepreneur

S2E11: Starting From Zero -

Getting the Money Started As An Entrepreneur

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The hosts of Your World, Your Money come back together and re-visit some topics and terms on entrepreneurship you heard throughout the mini-series. They are complicated, we get it. In this episode, Mary, LaQuita Ann and Lauren will break the numbers down, explain some of the Venture Capital world you hear so much about, and chat about realistic trends and truths in the world of entrepreneurship.

Download the episode's key takeaways here.

This episode was produced by Global Thinking Foundation USA and Hangar Studios.

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Mary: [00:00:45] Hi there happy money people, and welcome back to Your World, Your Money. I know we said we were wrapping up our entrepreneurship series last week, but guess what? We're bringing you one final episode with our lovely co-host, LaQuita Ann, we love her. She's back. And our new guest host for the season, Lauren Stockmann Brown, who will be joining us for more conversations later in the season.

 

Ann: [00:01:09] What's up, everybody? Yes, Mary, I am super excited for this episode because, of course, I love all things entrepreneurship and money. So I am ready for today.

 

Mary: [00:01:22] You just make my heart saying I can't help it.

 

Ann: [00:01:25] Thank you. I miss you.

 

Lauren: [00:01:27] I can hop in. My name is Lauren Stockman Brown. I'm so excited to be here. I'm an assistant program manager at GLT and I'm excited to honestly just learn something new throughout this episode and some new vocabulary. I can't wait to dive in.

 

Mary: [00:01:41] I can't wait. This is going to be so fun. So today we want to come back together at the end of this mini-series and revisit some topics that you heard from our entrepreneur guests that you may or may not be familiar with. We're going to break some of them down and we're going to chat about the realistic trends, numbers, and truths in the world of entrepreneurship and startups, because, you know, we really do actually get it. It's extremely tough, especially when you're just starting up to understand all those words and keeping in mind the perspective around those crazy investment numbers or in valuation numbers that you sometimes hear in the news.

 

Lauren: [00:02:18] Let's talk some truth about the startup and entrepreneurship world and look at how people are getting funding and how they are getting started. Small businesses make up 99.9% of all US businesses, and Millennials and Gen Zer’s are 188% more likely to have current goals of starting their own business than baby boomers. 30% of small enterprises fail in the first two years and fifty percent fail in the first five years. Over 600,000 small businesses open every year in the United States, with currently about thirty million small businesses in the US. Now, remember, small business is a broad term and applies to a lot of people and a lot of businesses literally just requiring that the small business employ less than five hundred people. But more than 95 percent of these 30 million will employ less than one hundred employees. Wow, that's a lot, and 20, 19 women of color on 47 percent of all women-owned businesses, LatinX women own 17 percent of women owned businesses and minorities own 45 percent of small businesses.

 

Mary: [00:03:19] That actually sounds pretty cool. And also, thank you so much for sharing all of those numbers. That's a lot like when you think about it, that so many businesses and I personally appreciate the perspective that almost all of these small businesses will have less than one hundred employees. Think about what you hear in the news and the news I only ever hear about, like the big tech companies that have like, I don't know, five thousand employees and two Google complexes and somewhere in California that it has apparently its own zip code. So I appreciate that personally.

 

Ann: [00:03:51] That's actually super true. You also hear about or the small businesses where like we got one hundred million dollars in startup funding and I'm like, hello, that's not like most small businesses.

 

Mary: [00:04:03] Yeah, right. One hundred. Yep. Oh, my gosh. So that's actually a great Segway for me. Thank you so much. Always. You just come with the best Segways. So when we think about these small businesses all put together, we have to think about, you know, where their funding comes from and of course, finance as well as what we talk about here. So if we go back to 2013, nineteen point four million small businesses, we're sole proprietorships. And that means the person that founded it is the sole owner and one point six million were partnerships. That means multiple owners, usually with some kind of equal contribution to the business. And one point four million were corporations, think board of directors and legally separate from the owner. And this is where you hear phrases like S Corp and C Corp (these are two options providing different benefits to stakeholders), stakeholders, probably meaning investors. So when we hear things like this, what are the actual main types of funding? So the big ones are traditional loans, SBA loans. That stands for Small Business Administration loans, business credit cards, short-term loans, grants, and crowdfunding. And just to kind of keep some perspective as we jump into this and talk about more these terms and how all of this works, the average SBA loan is 417,314$ and the average SBA microloan is only 13,000$.

 

Mary: [00:05:36] So when you hear people talking about those hundred million dollar loans that they're getting for that tech company, keep in mind most of these are going to be four hundred and seventeen thousand or thirteen thousand. And in 2018, banks approved 26.9% Of small business loan applications. So when you're thinking about all of those that we just listed, the traditional SBA business credit card, short-term loans, keep in mind that only about 30 percent of those actually get approved by a bank. So one thing that we hear all the time, and I am sure Ann and Lauren and I are going to have fun with this one when it comes to Venture Capital funding, VC funding, we hear about that in the news a lot like a lot. A lot. A lot. A lot. We even have an episode just on that. But here's our friendly disclaimer for today. VCs only fund about three hundred new startups each year, and that's literally zero 0.05% Of all new businesses in the United States, 0.05%. Now, we love you if you're ready and think that you're one of those zero point zero five percent, but also for everybody else out there, remember, there's other funding types. There's other ways to go about this.

 

Lauren: [00:06:53] So Annn my first question for you, so let's start with something we've heard from many of our guests, crowdfunding for your business when starting up. As crowdfunding is getting more and more popularity as a way for founders to fund their businesses without having to have an investor. It can also be an intimidating and vulnerable process for people without resources or a larger network. What does crowdfunding usually look like for startup entrepreneurs?

 

Ann: [00:07:16] Great question. Lauren. And I happen to love discussing this topic. First of all, there are two overarching types of funding for a startup entrepreneur. So we have debt financing and equity financing. Most of what we'll talk about after this will fall into one of these two categories. So let's start with debt financing, which is usually some type of loan. So think of it this way. You're taking out new debt in order to have funds for your new business. And then we have equity financing, which is usually some type of investment in exchange for either reward or equity, which is some sort of ownership into your business. And this is like the old school barter system receiving funds without creating debt. But you have to give something in exchange, right, so you can come up with some cool prize or something, if you don't necessarily want to give up ownership into your company, but within crowdfunding, you can do equity crowdfunding, rewards crowdfunding, debt crowdfunding, and donor crowdfunding. I know, folks, that's a lot of crowdfunding right? But the good news is you can get funding, right? So with the equity crowdfunding, it's a way to raise capital to start or grow your business. So investors invest money in a business in exchange for equity, typically in the form of shares in the company. So an investor receives ownership in the company and in return the company receives the capital it needs to launch or expand. And then we have rewards based crowdfunding. I've seen a lot of these people actually on Shark Tank. They're like, well, we did an Indiegogo or whatever, and then they got they got money. Right. But this rewards base or seed crowd. Funding is a type of small business financing in which entrepreneurs solicit financial donations from individuals in return for a product or service. And there are about 19 times as many rewards campaigns as there are for it's closely related counterpart equity based crowdfunding. And this is kind of cool because then you get a chance to get people involved in your in your business and seeing your success right. Who wouldn't ordinarily be able to invest thousands of dollars, which I think is kind of cool.

 

Mary: [00:09:37] I have to say, as soon as you said this barter system and rewards based crowdfunding, the first thing I saw was like, you walking. I was like, OK, so I'll have a thousand go to my company. Here are some eggs. They're really, really delicious. And this is what they just like, bought the system in my brain immediately.

 

Ann: [00:09:52] That's true. I probably would invest in someone for sushi or mac and cheese.

 

Mary: [00:09:57] Oh, yes. Sushi, yes.

 

Ann: [00:09:59] Yes. Sushi or mac and cheese. So if anyone is looking for investment and you have really good mac and cheese or really good sushi, hit me up.

 

Mary: [00:10:08] I'm on board with this. Yeah, I'm with LaQuita Ann. We're going to do this for sushi. I don't know about the mac and cheese. It might kill me. I'm gluten-free and vegan, but like the sushi, I'm here for it. So if you want to murder me, come to me with the mac and cheese. But if you want both of us, it's the sushi.

 

Ann: [00:10:21] Oh, that's cool. We're like the sharks, right?

 

Mary: [00:10:24] Oh, we are.

 

Lauren: [00:10:27] So Form C, what is it? It sounds simple - form C, but how does it function differently and what should you know about that.

 

Ann: [00:10:33] Oh I want to answer this one. Cool.

 

Mary: [00:10:36] Thank you so much for taking that for me.

 

Ann: [00:10:39] Yeah. I've been dying to answer this about form C, so Form C is an regulation + declaration form, an “offering statement,” that has to be filed with the government under Title III of the Jumpstart Our Business and StartUps Act (JOBS Act) of 2012 Securities Action Section 4(a)(6). Yes folks. Did you get all of that?

 

Mary: [00:11:04] If you didn't, it's OK. It's all right. We'll take notes for you.

 

Ann: [00:11:09] Memorize it folks. You need to know it. No, I'm just kidding. This form states, hey gov, Im raising money through crowdfunding, and so I don’t have to register my businesses securities with the SEC (securities and exchange commission) So do all of you know what the SEC is? I'm going to tell you it's the Securities and Exchange Commission. And this form is also a declaration to the government stating how much you crowdfunded, your main contributors (because they are under regulation too!), and proving that you did not crowd fund over the maximum amount allowed (previously 1,070,000; but now changed to 5,000,000 in certain circumstances). Wait a minute. That's a big jump, right? Yeah, I'm like one point seven, but that's huge though. It's huge. That's pretty cool for all of you though, right. Like now you can do five million. So they're there on your side, folks. They want you to get that money to launch your business

 

Mary: [00:12:10] And to plug one of our guests from one of our other episodes, because in case you haven't listened to it, you should go back and listen to it. We had one of the heads of Backstage Capital on here and Backstage Capital is actually the first organization to crowdfund the full five million new maximum. So, like in case you're wondering, we had one of those cool record-setting people on here.

 

Ann: [00:12:32] That's actually really, really cool. Wow. I was not on that episode. That's super cool.

 

Mary: [00:12:39] I know we missed you. I was crying.

 

Ann: [00:12:40] I know. That's actually so, so cool.

 

Lauren: [00:12:44] So I'll bring us to our next question, Mary. For the early entrepreneurs that decide to seek funding and capital, what should they know about all the different options before choosing a route for their businesses?

 

Mary: [00:12:57] I really love this question and I'm really going to hone in on Venture Capital and something else that we'll hear in the episodes where some of our guys. Called Cap Table, and I'm going to focus on Venture Capital, like I said, because it's such this tiny sliver of the entrepreneurship conversation, but think about how much it occupies the news and how much you hear it. So I'm going to give a little bit more on Venture Capital, just because I want to kind of bring us to a place where we feel like we have perspective, no matter what we're hearing in the news or what our friends are talking about. So venture capital, you've heard me say it like, what, 15 thousand times by now is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long term growth potential. Venture Capital generally comes from well-off investors, investment banks, and any other financial institutions.So what you're going to hear when you hear people talk about Venture Capital or when you hear on the news, these are some of the things that you'll actually hear. So first you'll hear, seed financing and seed financing is kind of like the ideation stage. So let's say you have a business plan. You wrote it all down on paper and you want to seek VC funding, you're going to seek it while it's still in that ideation phase. So when you hear that in the news, that's what that is. Then you have startup financing. Startup financing is when you have a prototype. And let's say you're hiring that chief product officer or your chief technical officer, that's when you want to seek Venture Capital. And it's called startup financing. That's the stage. The next stage is super easy. I don't even have to try, first-stage financing. Woohoo! Who would have thought so? First stage financing is when your product has launched and it's kind of proven that people actually kind of want this next stage. Also super easy. Second stage financing is when you're about three years in and your products just killing it like your product. Everybody loves it. You've proven that it's great, doing awesome in the market and you're going to come back to your VC and you're going say, hey, I'm here for second stage financing. The last stage that you'll hear about in the news is called mezzanine or bridge financing. And that is the end of the VCs time with you. That's when you're finally breaking up. But like it's amicable. It's not a divorce. Don't worry. So you're breaking up with your VC in friendly terms. You're keeping each other's phone numbers and you're about to take your company public. Or maybe you're selling to another company. That's when you're going to hear these phrases, mezzanine financing or bridge financing or bridge funding. That's what that is. So I feel pretty equipped now to listen to CNN and, you know, like TechCrunch and stuff. So I'm feeling better about this. So one thing that I want to highlight when you're hearing all of this on the news is that you can seek VC funding if you think it's right for you at any stage. So that's why I wanted to talk about those different stages.

 

Mary: [00:15:49] And what they mean when you hear them is because let's say you want to be that 0.05% And you already have your product and it's already on the market, but you're like, you know what, my product is awesome. You can seek VC funding at any stage. So jump in there in that first stage financing or second stage financing, but not the mezzanine financing. That bridge financing is for the breakup. We don't want that. That comes later. So the last thing that I wanted to talk about with VC is a phrase that you'll hear one of our guests reference and also something you'll hear sometimes in that crowd, quote unquote. It's called cap table. Cap table is a capitalization table for people that love spreadsheets. This is for you. So a capitalization table is a table providing an analysis of a company's percentages of ownership, equity dilution. That's a whole other thing. But remember when Ann was talking about equity, it's really about ownership and dilution. We know what dilution means. If you don't, go and get a glass of grape juice and then put a drop of water and see what happens versus putting a drop of grape juice into a glass of water and the value of equity in each round of investment by founders, investors and other owners. So what all of that is to say is it's literally a spreadsheet saying here are all of the owners, how much they own and what type of ownership they have. So, again, spreadsheet people, this is for you. We love you. This is for you.

 

Lauren: [00:17:16] OK so, IPO. I feel like this is a one word thing on this document that I've seen in my common life. Initial Public Offering. What does it mean, IPO?

 

Mary: [00:17:28] Wait, Lauren, where have you seen this in your real life? I'm so curious, do you listen to TechCrunch too? This is when Lauren comes back and she's like, I listen to TechCrunch every morning. I don't know what's wrong with you. So I do actually listen to TechCrunch every morning. It might be bad for my social health, but yes, I would love to tell you what IPO Initial Public Offering stands for, well, means. So. An Initial Public Offering refers to the process of offering shares of a private corporation to the public in a new stock issuance. And so if you don't know anything about this new stock issuance or about the stock market, don't worry, we have a New Investors mini-series coming right after this. So buckle up for all of that. But coming back to a new stock issuance, so public share issuance allows a company to raise capital from public investors. So remember before we were talking about VC funding, which is all private. So this is this place. All right. So we're in the bridge funding stage, mezzanine funding. We're breaking up with our VC, but amicable. We're keeping each other's numbers, still there. And so we're breaking up with them and now we're moving into the public sphere. So public share issuance allows a company to raise capital from public investors. That could literally be me, you, Lauren, LaQuita Ann and all the other people on here that you can't see. So that could be anybody. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment, as it typically includes share premiums for current private investors.

 

Mary: [00:19:10] So many things in there to explain. But hang on, we've got one one more thing to say and we'll come back. Meanwhile, it also allows public investors to participate in the offering. So that means a person in the regular public could participate in buying shares or part of a company that they want to support. But going back to what we said a second ago, this whole private investors to fully realize gains, that literally means that private investors are going to get an idea of how much of a profit that they're going to get from their original investment. And remember when we were saying share premiums for a current private investors, that really just comes back to how much is each individual share, piece of the company going to be listed at, and what is its premium going to be? So that's kind of breaking that because that, come on. That was kind of a tough sentence. I read it and I was like, that's a little uncomfortable to read. So that's what an IPO is, an initial public offering. I know there was a lot on here about Venture Capital, but in our entrepreneurship series, there is a whole lot of conversation around venture capital and we just wanted to break a lot of it down and kind of give some realities behind this because we hear it so much. Right. But I don't feel like we get to talk about all the realities of it.

 

Ann: [00:20:27] So thank you so much for joining us today. Next week, we will be entering our new investor mini-series and we are so excited to dive into the truth and logistics about investing. We will kick the mini-series off with an investing 101 episode with Erin Lowry, known as Broke Millennial. Broke Millennial. That's so cool. She has something good to tell you folks. You don't want to miss it. I'm telling you, you don't want to miss it. Just that title. She's going to be dishing all the goods, right. So join us for that.

 

Mary: [00:21:00] She's stellar. And if I can just tell everybody, you'll be laughing so hard. I literally had to put my mic on mute for over half of that episode. She's stellar. So the last thing we want to leave with you all is don't forget to check out our Calling All Voices on our website. I know we mentioned it every time, but it's pretty important and it's pretty cool. It's our open call for papers submitted by you and celebrated by us. We want to hear all voices, opinions, walks of life and unique views on gender, sexuality, identity, and finances from the whole lot of you. Our top picks will be published and the winner will be on our podcast chatting with these amazing people. Who doesn't want to do that? What's wrong with you?

 

Ann: [00:21:42] Exactly.

 

Mary: [00:21:44] Don't forget to check out our podcast web page for a one-pager with key takeaways, lists of sources, and references for further reading and preparation for your start-up and new business goals.

 

Lauren: [00:21:56] Thank you guys for having me, answering all my questions. And thank you listeners for tuning in.