First, let’s figure out why we are talking about funding as something you need to do. This is not a given. The opposite of funding is “bootstrapping,” the process of funding a startup through your own savings. There are a few companies that bootstrapped for a while until taking investment, like MailChimp and AirBnB.

If you know the basics of how funding works, skim to the end. In this article I am giving the easiest to understand explanation of the process. Let’s start with the basics.

Every time you get funding, you give up a piece of your company. The more funding you get, the more company you give up. That ‘piece of company’ is ‘equity.’ Everyone you give it to becomes a co-owner of your company.

Splitting the Pie

The basic idea behind equity is the splitting of a pie. When you start something, your pie is really small. You have a 100% of a really small, bite-size pie. When you take outside investment and your company grows, your pie becomes bigger. Your slice of the bigger pie will be bigger than your initial bite-size pie.

When Google went public, Larry and Sergey had about 15% of the pie, each. But that 15% was a small slice of a really big pie.

Funding Stages

Let’s look at how a hypothetical startup would get funding.

Idea stage

At first it is just you. You are pretty brilliant, and out of the many ideas you have had, you finally decide that this is the one. You start working on it. The moment you started working, you started creating value. That value will translate into equity later, but since you own 100% of it now, and you are the only person in your still unregistered company, you are not even thinking about equity yet.

Co-Founder Stage

 As you start to transform your idea into a physical prototype you realize that it is taking you longer (it almost always does.) You know you could really use another person’s skills. So you look for a co-founder. You find someone who is both enthusiastic and smart. You work together for a couple of days on your idea, and you see that she is adding a lot of value. So you offer them to become a co-founder. But you can’t pay her any money (and if you could, she would become an employee, not a co-founder), so you offer equity in exchange for work (sweat equity.) But how much should you give? 20% – too little? 40%? After all it is YOUR idea that even made this startup happen. But then you realize that your startup is worth practically nothing at this point, and your co-founder is taking a huge risk on it. You also realize that since she will do half of the work, she should get the same as you – 50%. Otherwise, she might be less motivated than you. A true partnership is based on respect. Respect is based on fairness. Anything less than fairness will fall apart eventually. And you want this thing to last. So you give your co-founder 50%.

Soon you realize that the two of you have been eating Ramen noodles three times a day. You need funding. You would prefer to go straight to a VC, but so far you don’t think you have enough of a working product to show, so you start looking at other options.

The Family and Friends Round: You think of putting an ad in the newspaper saying, “Startup investment opportunity.” But your lawyer friend tells you that would violate securities laws. Now you are a “private company,” and asking for money from “the public,” that is people you don’t know would be a “public solicitation,” which is illegal for private companies. So who can you take money from?

1. Accredited investors – People who either have $1 Million in the bank or make $200,000 annually. They are the “sophisticated investors” – that is people who the government thinks are smart enough to decide whether to invest in an ultra-risky company, like yours. What if you don’t know anyone with $1 Million? You are in luck, because there is an exception – friends and family.
2. Family and Friends – Even if your family and friends are not as rich as an investor,  you can still accept their cash. That is what you decide to do, since your co-founder has a rich uncle. You give him 5% of the company in exchange for $15,000 cash. Now you can afford room and ramen for another 6 months while building your prototype.

Registering the Company

To give uncle the 5%, you registered the company, either though an online service like LegalZoom ($400), or through a lawyer friend (0$-$2,000). You issued some common stock, gave 5% to uncle and set aside 20% for your future employees – that is the ‘option pool.’ (You did this because 1. Future investors will want an option pool;, 2. That stock is safe from you and your co-founders doing anything with it.)

The Angel Round

 With uncle’s cash in pocket and 6 months before it runs out, you realize that you need to start looking for your next funding source right now. If you run out of money, your startup dies. So you look at the options:

1. Incubators, accelerators, and “excubators” – these places often provide cash, working space, and advisors. The cash is tight – about $25,000 (for 5 to 10% of the company.) Some advisors are better than cash, like Paul Graham at Y Combinator.
2. Angels – in 2013 (Q1) the average angel round was $600,000 (from the HALO report). That’s the good news. The bad news is that angels were giving that money to companies that they valued at $2.5 million. So, now you have to ask if you are worth $2.5 million. How do you know? Make your best case.  Let’s say it is still early days for you, and your working prototype is not that far along. You find an angel who looks at what you have and thinks that it is worth $1 million. He agrees to invest $200,000.

Now let’s count what percentage of the company you will give to the angel. Not 20%. We have to add the ‘pre-money valuation’ (how much the company is worth before new money comes in) and the investment

$1,000,000 + $200,000=              $1,200,000  post-money valuation

(Think of it like this, first you take the money, then you give the shares. If you gave the shares before you added the angel’s investment, you would be dividing what was there before the angel joined. )

Now divide the investment by the post-money valuation $200,000/$1,200,000=1/6= 16.7%

The angel gets 16.7% of the company, or 1/6.

How Funding Works - Cutting the Pie

What about you, your co-founder and uncle? How much do you have left? All of your stakes will be diluted by 1/6. (See the infographic.)

Is dilution bad? No, because your pie is getting bigger with each investment. But, yes, dilution is bad, because you are losing control of your company. So what should you do? Take investment only when it is necessary. Only take money from people you respect. (There are other ways, like buying shares back from employees or the public, but that is further down the road.)

Venture Capital Round

Finally, you have built your first version and you have traction with users. You approach VCs. How much can VCs give you?   They invest north of $500,000. Let’s say the VC values what you have now at $4 million. Again, that is your pre-money valuation. He says he wants to invest $2 Million. The math is the same as in the angel round. The VC gets 33.3% of your company. Now it’s his company, too, though.

Your first VC round is your series A. Now you can go on to have series B,C – at some point either of the three things will happen to you. Either you will run out of funding and no one will want to invest, so you die. Or, you get enough funding to build something a bigger company wants to buy, and they acquire you. Or, you do so well that, after many rounds of funding, you decide to go public.

Why Companies Go Public?

There are two basic reasons. Technically an IPO is just another way to raise money, but this time from millions of regular people. Through an IPO a company can sell stocks on the stock market and anyone can buy them. Since anyone can buy you can likely sell a lot of stock right away rather than go to individual investors and ask them to invest. So it sounds like an easier way to get money.

There is another reason to IPO. All those people who have invested in your company so far, including you, are holding the so-called ‘restricted stock’ – basically this is stock that you can’t simply go and sell for cash. Why? Because this is stock of a company that has not been so-to-say “verified by the government,” which is what the IPO process does. Unless the government sees your IPO paperwork, you might as well be selling snake oil, for all people know. So, the government thinks it is not safe to let regular people to invest in such companies. (Of course, that automatically precludes the poor from making high-return investments. But that is another story.) The people who have invested so far want to finally convert or sell their restricted stock and get cash or unrestricted stock, which is almost as good as cash. This is a liquidity event – when what you have becomes easily convertible into cash.

There is another group of people that really want you to IPO. The investment bankers, like Goldman Sachs and Morgan Stanley, to name the most famous ones. They will give you a call and ask to be your lead underwriter – the bank that prepares your IPO paperwork and calls up wealthy clients to sell them your stock.  Why are the bankers so eager? Because they get 7% of all the money you raise in the IPO. In this infographic your startup raised $235,000,000 in the IPO – 7% of that is about $16.5 million (for two or three weeks of work for a team of 12 bankers). As you see, it is a win-win for all.

Being an Early Employee at a Startup

Last but not least, some of your “sweat equity” investors were the early employees who took stock in exchange for working at low salaries and living with the risk that your startup might fold. At the IPO it is their cash-out day.

Inspired by: How to Fund a Startup, Paul Graham

The post How Funding Works – Splitting The Equity Pie With Investors appeared first on Funders and Founders.

“Forget everything you learned,” they told me on the first day of law school. Three years and $150,000 later they erased from my mind all the half-truths I learned from school and my family. They were not teaching law, they acknowledged, they were teaching thinking. As an entrepreneur, you, too, have to relearn everything from scratch. By yourself.

As much as it seemed like a ripoff back in law school, I later realized knowing how to think is the most valuable thing. Period. You can do it yourself, for free, but be ready to painfully rethink everything you know, with a lot of courage. The reason is that by the time you figure out you have to unlearn you are already packed with multiple identities – the child, the student, the spouse, the employee, the citizen, the parent. None of them teach you to be an entrepreneur. Or to see opportunity. They just tell you what is required of you. To see opportunity – for that you have to think yourself. And, just as importantly, rethink and unlearn what you were told in your pre-entrepreneur life.

Get on the right line of thinking

I was riding the New York subway a couple of years ago. Got lost and came out in the wrong place.  Same with thoughts – you find out you got on the wrong line of thinking on

The post Getting On The Right Line Of Thinking – Think Like an Entrepreneur appeared first on Funders and Founders.

Wanting impact goes back to the question of why we are alive. Often we answer it by saying what we want to do in life. To grow, to learn, to experience, etc. Counting the people we impact, there is another way to think of this. You can focus on the impact of what you do rather than on what you do. Once you do that, you might see that you want to do things with the biggest impact.

My generation of people, Gen Y, wants to have a big impact on the world even before they figure out what they want to do. And that is a good thing. The scale of what you do is probably more important than what you do. Someone who gives wonderful haircuts in their town makes less of an impact than someone who opens a successful national haircutting chain. You can scale your vision to fit within your city, or your can scale the world to fit your vision. That is the startup way.

Counting The People

On average we live for 78.3 years. Most of us remember people we meet after age 5. Assume we interact with 3 new people daily in cities, 365 days in a year plus leap yeas days is 365.24. In total it will be (78.3 – 5) x 3 x 365.24 = 80,000 people. Is it a lot?

Either way most of us will meet around 80,000 people in the course of our lives. These are people you could offer something. There are many more people who you will never meet, and yet they might love to have what you can offer.

Sources for the infogaphic:

• Startup failure rate is 75% Wall Street Journal</li>
• Life Expectancy World Bank
• Startups grow at 5% Y Combinator
• 1000 early users – based on analysis of Y Combinator startups at YClist
• Childbearing Age is 25 CDC
• Average firm size (to determine average number of colleagues) U.S. Small Business Administration

The post Why We Live – Counting The People Your Life Impacts appeared first on Funders and Founders.

A lot young people have an education. Often it is the education that disables them from doing – they know so much that they don’t even know where to start. Walking out of my law school graduation I remember sensing that I had too much information, and little idea of what to do with it.

What does the alternative look like? Having little information, and acting on what you know. This infographic very simply describes the life paths of two big entrepreneurs who built their businesses on one realization.

Manoj Bhargava

The first is a man who came from India. He dropped out of Princeton after a year. Then he went back to India for 12 years to meditate at an ashram. His goal? To learn to be still. After 12 years he came back and realized (or remembered) from prior jobs in the plastics factories that chemicals are much cheaper than the end products made out of them. He then bought some vitamins and caffeine and mixed them into a drink similar to something he took a swig of at a trade show. The 5 Hour Energy was born. The man is now a billionaire.

Pejman Nozad

The second man came from Iran. Knowing almost no English he called another Iranian man about an ad for a rug salesman. Accepted, he started going around the Silicon Valley showing his rugs. His million-dollar realization? People who buy rugs are not only rich, they are influential. And they could be a mentor if you really ask. A lot of questions. So the rug salesman gradually learned about venture capital and started to arrange investor and entrepreneur meetings in his rug shop. Today he is one of the most respected VCs (source: forbes.com).

There would be a lot more big entrepreneurs in the world if more of us had this type of one-realization mindset. The problem is not that you and I never had realizations like these two. We have had too many. And the many of them make us question if the one you had an hour ago is really the one. Or should you wait to see “if you are really passionate about that idea.”

Whether this is called being still, being focused, uninformed, or even stupid – it would help to be a bit stupider so we can act on our realizations and start companies.

The post Small Realizations of Big Entrepreneurs appeared first on Funders and Founders.

You can see that Gross World Product (all the stuff the world produces) grew exponentially after industrialization because serious mass production became possible.

Creating Value in Different Periods

The Hunter Age. After hunter-gatherers became growers and herders, some people realized that it is faster and easier to go take other people’s crops and cattle than grow your own. War became popular. And wealth got a bad reputation.

The Warrior Age. Going to war was the way of creating value for the king. If you came back alive he would give you land and slaves in exchange (you became his vassal).

The Craftsmen Age. The world pretty much stayed that way until about 9th century, when some people (who were too smart to be peasants but not aggressive enough to be vassals) realized that they could avoid being plundered by kings and their soldiers if they organized themselves into bigger groups – that is how cities were born. This is the time people first got the incentive to work harder and smarter, in other words be entrepreneurs. In cities, these people, called craftsmen or artisans, created value by making both useful and decorative artifacts.

The Explorer Age. Cities changed everything. Ideas swirled around and the more unscared ventured out to find the far away lands. They came back with silks, spices and other things people wanted but could not have before.

The Merchant Age. Once the far away lands were discovered, people who didn’t mind the risk of sailing really far to bring back exotic goods became the merchants.

The Mechanization Age. As craftsmen kept perfecting their skill, they came up with machinery. With machines you could mass produce things,  thus creating value a lot faster. Owning a machine became the next big thing.

The Industrialization Age. When electricity came around and machines became electric-powered, they started producing even more even faster. Industrialists became the big guys.

The Oil Age. Around this time, cheap cars and trucks came around. With the demand for fuel growing, people realized they could drill for oil. Like the Rockfellers and the Gettys, you would have been big if you discovered oil (or bought up oil futures, or oil companies.)

The Corporate Age. Now that you have trucks, you can distribute your factory’s goods almost anywhere. Factories realized they could reach a lot more consumers, so they organized themselves into factories with lots of departments – that is corporations. Being a corporate executive was the best thing you could do.

The Financial Age. As corporations grew very large, creating value in the order of billions, banks realized that they could buy corporations and resell them for more. Since the corporations were so expensive, even making a small margin on the sale was a lot of money. Being a banker (and doing lots of leveraged buy-outs) became the best thing to do in life.

The Information Age. When corporations started employing hundreds of millions of people, and these people started spending money, banks started to need to manage the transactions – a lot of data. The information age  started and technology developed rapidly.

The Startup Age. Corporate workers started realizing that in a group as large as a corporation their contribution was not visible, and even if they wanted to work 10 times harder they could not ask their boss to pay 10 times more. Technology lowered the cost of starting a company. And now being a startup founder is the best you can do.

All of the above ways of creating value still exist. Startups today are the way to create value with the most impact.

The post The History of Creating Value – How Humans Made Money In Different Eras appeared first on Funders and Founders.

If you were to guess whether world’s top 100 richest people got their money from someone else or made money themselves – you would be right to guess that most of them made their own money. But you might think that even the self-made had advantages you don’t have.

From Zero to Billionaires, Almost?

After all, Mark Zuckerberg’s father is a dentist. Maybe it did not help him become a billionaire. After all a dentist couldn’t be much help with hacking. But you also might think that having a dentist dad makes it easier to not worry about what you are going to eat tomorrow.

There is no denying that Sergey Brin is a self-made man, but you might think that his father and grandfather, both mathematicians, had something to do with him studying math in the first place.

So if your father is a cab driver or if you have no father at all, is it still possible to become a billionaire? Apparently, it is. Researching the top 100 richest people in the world, all of whom are billionaires of course, we found 8 that were from absolute humble backgrounds. In fact even worse than the average. On top of that, they never got a college degree.

(Roman Abramovich, Russian billionaire and owner of football club Chelsea would be number 9 on the list, but he got a correspondence degree in law later in life. So technically he does have a degree. But otherwise he was poor, an orphan and qualified.)

Source: bloomberg.com/billionaires

The post From Zero to Billionaire – Self-Made Billionaire Paths appeared first on Funders and Founders.

The number two reason why startups fail is running out of cash. How can you make sure your cash does not run out before you make money?

Recently, I visited Happy Farm, a startup incubator in a small Ukrainian village. Most people do not think about a village as the land of opportunity. So what are startup entrepreneurs doing in a village? Two things – actually working (as opposed to enjoying city life) and reducing their burn rate. And Happy Farm successfully attracts people even from outside  Ukraine. But why go abroad to do a startup?

Why Go?

Arguably, if you know what you want to build,  you could start your startup anywhere. You could just take your laptop, sit down in your bedroom, shut the door, and build your product. Done. Seems straightforward. But there are good reasons to go somewhere else.

San Francisco – Sure, If You Already Have Your Product

The top place startup founders want to go is San Francisco. Three reasons: more access to capital, early adopter community, and the startup flow. Here is the problem: if you get here without your beta ready, you are will not benefit from the investors and the early adopters since you have nothing to pitch investors and nothing for early adopters to adopt yet. So the flow…again, even if you go to a lot of events and meet the best people – you still won’t be able to show them your beta. So why come to San Francisco? Perhaps, a different perspective? Inspiration? Fair enough. But it will cost you. San Francisco’s 1-bedroom apartments are around $2,000 per month. Monthly cost of living is at least $3,000. And while you are paying $3,000 you are still sitting in your apartment and, hopefully, building the beta. And if you are not, you really should be. That means to bootstrap even for 3 months you need roughly $10,000. Now maybe you want to look at other places to build your product?

Looking for the Perfect Place

The cheapest place may be your parents’ basement or your friend’s couch. These real rock-bottom deals will cost you freedom, though. What we are looking for here, then, is the best value for your money. A comfortable hassle-free life for less than $1000/month.

Recently, as I traveled from San Francisco to London, Dubai and then India, it became clear that seed-stage startups can have a lot more runway in some locations than others. As I finally settled into an Indian village to focus on my own project, I wanted to find out what other bootstrapping-friendly locations there are in the world.

How Cheap?

Here is a rough comparison of my burn rate in San Francisco vs. small town India:

I also noticed from being in India that plenty of software-building teams have figured out the economics of starting up in countries like India and the neighboring Thailand.

Why travel when bootstrapping?

Scenario 1. The Savings Burner. You quit your job.  You are burning through your savings account. Say, you have $6,000 in the bank. In San Francisco, you will burn through it in 2 months (even without renting office space). In India you can comfortably bootstrap for 6 months (eating out every meal, and even having a cleaner).

Scenario 2. The Get-Away Founder. You want to escape your “normal life” ( your routine, your family, etc.) There are two main benefits to moving. 1. The Immigrant Effect – as a newcomer you won’t know about limitations placed on members in that new society. You are going to act as if those limitations don’t exist. This is one of the reasons immigrants tend to be successful entrepreneurs. 2. The other reason is that your family and friends, neighbors and colleagues, and every other aspect of your “normal life” will not be there – so you can do the abnormal thing – work on your startup, without them constantly checking up on you.

Where to go to start your startup?

There is a difference between business-friendly countries, and bootstrap-friendly countries. If you want to know which countries are in general more conducive to business, World Bank index does the job. But it includes a lot of things that a seed-stage startup does not need – like registering the entity, taxes, etc. Also, we are not talking about fund-raising here. For fundraising, the U.S. and the UK are by far the best, but before you get to the funding stage, you need to build something.

Here are the criteria that matter for choosing your bootstrapping location:

1. Low burn rate (low rent, low food prices) under $1000/month
2. Fast and cheap internet
3. Developed local infrastructure – transportation, access to food and consumer services
4. Generous visa policy (at least a 3-months visa initially)

In short, the place should be cheap, hassle-free, and comfortable. And it turns out some places can let you have your cake and eat it too.

Startup Bootstrap – Best Value Countries

While the cheapest destinations may be Congo and Iraq, the point is not dirt-cheap existence, but the most bang for your bootstrap buck. $1,700 a month for broadband in Cuba, anyone? Not a joke. Best value usually comes from 3 things: 1. The economy is still developing (or temporarily distressed, like in Portugal);  2. There is a lot of competition, so businesses want to serve you better;  3. There is a culture of good customer service.

Here is my list of the most startup bootstrap-friendly destinations. This is the first edition, and suggestions are welcome.

ASIA

• India (Bangalore) –  the cheapest city out of the top 20 startup ecosystems in the world, ranked by Startup Genome. The visa is for 6 months. $1000 per month will buy you a very comfortable lifestyle.
• Malaysia – visa-free for 3 months for most countries, top-notch infrastructure in big cities. Singapore is just over the bridge.
• Thailand (Chiang Mai) – a known heaven for e-entrepreneurs. Affordable, cultural, and exotic.

EUROPE

• Bulgaria (Varna, Sofia ) – the best value for money in Europe. Varna is a resort town on the Black Sea, while Sofia has all the infrastructure and culture of any European capital.
• Portugal (especially Porto) – since 2008 Portugal’s market has not yet recovered. Rent is affordable, while services are still up to European standards. Porto, by the way, is home of the Port wine.
• Poland (Lublin) – competition is high among businesses, and the economy is up and coming. You will find quite a few developers here.
• Macedonia (Skopje, Ohrid) – an off the beaten track country that offers services and scenery on par with other modern cities. Ohrid offers beautiful lakeside scenery.

CENTRAL & LATIN AMERICA

• Nicaragua (outside Granada) – has become a trendy destination in the past 7 years, but most of the country outside the capital is a bargain.
• Ecuador (Cuenca) – cultural, but developed. Cuenca is remarkable, both the scenery and comfort.
• Mexico (interior) – while coastal Mexico is no longer cheap, there are plenty of cities in the interior that are.

MIDDLE EAST

• Egypt (outside Cairo) – especially, due to the political situation the accommodation prices are low now. As long as you stay out of Cairo, there is not a lot to worry about.
• Jordan (Amman) – modern, hassle-free, and rather Westernized. There are plenty of cafes and modern housing.

AFRICA

• Morocco (Casablanca) – this year rated the 3rd most welcoming country for outsiders in the world, Morocco is deeply cultural and modern at the same time.

Here is how some of these cities compare in cost:

Best Value Destinations Compared to New York City

For perspective, 100 is the Consumer Price Index for New York City:

Cost of living around the world from numbeo.com

Here is detailed cost of living for some of these destinations from numbeo.com:

Bangalore, India    Porto, Portugal    Cuenca, Ecuador   Chiang Mai, Thailand    Varna, Bulgaria    Skopje, Macedonia   Amman, Jordan

Which destinations do you recommend to start your startup and why?

The post Where to Start Your Startup – Best Value Destinations appeared first on Funders and Founders.

The post Everyone Will Have to Become an Entrepreneur appeared first on Funders and Founders.

As time went on you started wondering if you will ever achieve anything big. One day you read about someone who had the same idea as you. She made it into a company. Now she is a hero. And you think, “Why not me?”

What Is Possible?

Before anyone told you what is possible, you already knew the answer: anything.

The post What Is Possible When You Want to Become an Entrepreneur? appeared first on Funders and Founders.

The distance from  San Francisco to London is approx. 5500 miles.

The result is better for two reasons. One is you get a job done. It goes into your virtual portfolio – you can tell about it to your future employer, impress friends, and brag at parties. Because you’ve done it, not just studied to do it. The second benefit is that learning by doing is free. You pay no tuition. So what is the catch? You have to be brave. Don’t be scared of not knowing, take it as an opportunity to show what you can do.

Either way you have to learn something in life. You can take years to do it, or you can learn fast. MIght as well just learn fast and get on to the big stuff.

How do others learn fast?

• Learning by reading is like walking. If you walked 24 hours a day, and wore levitation boots you would arrive in London in 1833 hours.
• Learning through school is like biking. If you bike 24 hours a day, you will make it ti London in 366 hours.
• Learning from a mentor is like driving. If you drive 24 hours a day, you will be in London in 85 hours.
• Learning by doing is like flying a plane. In 11 hours you will get there.
• Learning by taking big risks – it’s like flying a rocket. And that is, in fact, what the a lot of successful entrepreneurs do. Richard Branson does it literally.  If flew a rocket, you will be in London in 33 minutes.

Entrepreneurs have the fastest speed of learning. You can learn faster if you:

• Jump in the water, then sink or swim – if you swim it took you 1 minute to learn
• Sell a product you don’t have to a big corportation (like Bill Gates did)
• Quite your job and use all your savings to start a company

Related: How To Never Give Up Becoming an Entrepreneur

The post How to Learn Fast – Comparing Speed of Learning appeared first on Funders and Founders.