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Funding a business startup

| Dec 1, 2020 | Uncategorized |

Changing economic times and products inspire new types of business. A business startup is one type of young company founded by entrepreneurs to create a new and distinctive product or service and bring it to consumers.

Funding

Startups usually have small budgets and little or no money coming in when they begin. Their idea still must be developed, tested, and marketed.

Their first goal is raising substantial financing to develop their product or business. Startups must make a strong case or develop a prototype supporting their claims that their concept is new or a vast improvement on anything on the market.

Startups can tap into traditional sources such as small business loans from banks or credit unions, Small Business Administration loans from local banks and grants provided by nonprofit organizations and Utah state develop agencies.

They can also try to seek financing from incubators associated with business schools and other nonprofit organizations. This usually assists with mentoring and office space. Financing may also be an investment in return for a stake in the startup.

Startups’ value

Investment is risky. Startups do not have a track records and even less profits to attract investors. In fact, most startups fail.

There are several ways to estimate the needed investment to launch a startup if their idea appears promising. The cost to duplicate method considers the expenses already incurred by the start up for product or service development and the purchase of tangible assets. This approach does not involve consideration of the startup’s growth potential or its intangible assets.

The market approach involves review of the acquisition costs of similar companies from the recent past. This method is impractical, however, if the startup concept is truly original.

The discounted cash flow method considers the startups anticipated future cash flow. This is a very subjective method.

The development stage method gives higher potential value to more fully developed startups. A startup that has a website, sales and customers is more likely to receive a higher valuation even if it is not yet profitable. Under this approach, the startup generally receive higher valuations than a company with an enticing or new idea.

Investors, regardless of the valuation method also judge the management team because of the high failure rate of startups. Angel investors in startups will not make an investment they cannot afford to lose.

An attorney can help new companies and entrepreneurs deal with legal obstacles. They can help assure that its organization and plan is legal and effective.