How Tech Companies like Google and Facebook raised money when they started
Very important for those of you in the startup game. Good to know for the rest
Hello all,
We have a very important topic planned. Since many of you either want to work in financial technology, work for big banks, or have aspirations of getting into the startup game, you will need to understand how funding works. How do companies raise money to handle the costs of the initial operations? Let’s get into it. When we look into it, there are 2 ways you can raise the capital needed-
Equity Financing
This simply means using equity as a way of raising money. Equity is a term that refers to a portion of your company/business. In EF, we sell a percentage of our business to an investor for money. We can then use this money to build bigger and better products, that will allow us to generate lots of revenue. By doing so, the company grows more in value, making you and the investor richer. Therefore in an ideal world, everyone makes money.
Most tech companies use Equity Financing to raise seed capital. Selling off equity allows startup founders a lot of flexibility. Since there are no obligations to make monthly payments, all the money can be put into the business. Thus equity financing is a great option for growth-focused organizations. Most tech companies use equity to finance their growth. This includes the startup we worked on, Clientell. We’re hiring right now, so check us out.
There are some downsides to this. Since you are selling ownership of your company, you have to listen to the investors. This is what the board of directors consists of. In some cases, the founders can even be kicked out of the company they created if the board owns a majority of the company. This happened with Steve Jobs and Apple.
Companies can have more than one investor. In fact, if you are involved in the stock market, you also “own” parts of these companies. If one of you becomes super-rich and buys a lot of the stock, you would end up on the board of directors of that company. If you’ve heard of hostile takeovers, that is what they are. Someone puts in a lot of money to get a majority voting share in that company to then influence decisions made. Just remember this newsletter.
Simple Example: Imagine you have a company selling an AI tool. You sell 10% ownership to investors to raise a million dollars. That values your company at 10 Million. You use this million to build products and get more clients. You now have more investors, willing to buy-in at a higher price. You can now sell the 10% for 10 Million Dollars, 10 times the previous amount. This means the new value of your company is now 100 million dollars. You and the original investors are now 10 times richer. Note that you will only get this money in your bank account when you cash out your stocks (sell them to someone else).
Debt Financing
Imagine you’re a visionary. True one-in-a-kind genius. As smart as one of my subscribers. But you’re quirky and insist on doing things your way. Therefore getting coowners is not to your benefit. You want to run things your way, to the very end. Therefore, instead of selling of your company, you take a loan. This is called Debt Financing.
You can do what you want. No annoying investors and board of directors telling you what to do. Using Debt will constrain you in other ways, however. Since you will have to pay payments for interest and principal, you won’t be able to put all your revenue into the business. This will make initial growth sooner. However, once you do pay off the debt, you become the sole owner of the company. Thus all the upside is yours.
Taking our earlier example, your business will take a lot longer to go from a 10 million to a 100 million valuation, since you won’t be able to put as much money into development and marketing. However, once it does, you won’t have to worry about any power struggles with the board, and you will be the sole owner.
There are many variants in this system. For example, you can sell non-voting stocks, which gives people ownership of the profits without giving them decision-making powers. On the debt side, you can reduce the risk to you by using structures like LLCs (limited liability corps). Knowing about financing is crucial because tech is in the end a business. Understanding basic financial and economic structures are crucial to maximizing your career.
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Devansh <3
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