angel investors

5 Investments That Aren't Stocks or Bonds

Damian Davila — Tue, 07 Feb 2017 10:00:14 +0000

Times are changing. Back in 2007, 65% of American adults reported investing in stocks. Fast forward to 2016, and only 52% said they have money invested in equities. This represents the lowest ownership rate of stocks in the 19 years of Gallup's annual economy and personal finance survey.

So, where is all the money going? While there are no clear answers to this question, there are alternatives to the stock market which might be palatable to certain investors. We'll explore these asset classes and ways in which even average investors might take advantage of their opportunities.

5 Types of Alternative Investments

While there is an ever-growing list of alternative investments, here are the five most common categories.

1. Private Equity

Unlike shares from publicly traded companies or exchange-listed mutual funds, shares of private equity investments aren't available on a public exchange. Instead, private equity is only available through private companies that seek underperforming businesses, turn them around using their team of expert managers, and increase profitability of those businesses. Once the market value of the purchased business increases, the private equity firm sells that business and gains a percentage fee from the sale proceeds. Additionally, managers of private equity firms often gain an annual fee for providing their management expertise to acquired companies.

2. Venture Capital

A subset of private equity firms, venture capital companies focus on startups and small businesses that have a long-term growth potential. Venture capital is a great opportunity to secure much-needed financing for companies with very limited operational history. In exchange for that cash flow injection, startup founders and small business owners provide venture capitalists (also known as "angel investors") a major say in most management decisions of the startup.

In recent years, some recipients of venture capital have turned into "unicorns" — companies with an estimated valuation of more than $1 billion — with Forbes listing American ride-sharing firm Uber and Chinese consumer electronics manufacturer Xiamoi in the number one and two spots, respectively. Venture capitalists are the first to profit when a startup or small business is acquired by a larger company or becomes listed on the stock exchange through an initial public offering (IPO). Unfortunately, angel investing usually requires significant capital of your own, so it's difficult for most investors to gain access to this investment class.

3. Hedge Funds

These are yet another subset of private equity firms. They're called hedge funds because when they first started, they had the objective to limit — or hedge — investment risk through a series of financial vehicles and investment strategies. However, that definition no longer applies and hedge funds are known as aggressive, risk-seeking investment funds that typically use leverage to offer "alpha" (abnormal rate of return against a benchmark).

Like private equity and venture capital firms, hedge funds pool funds from a number of accredited and institutional investors. Unlike other private equity and venture capital firms, hedge funds focus on a much broader set of assets and investments strategies, including equity long-short, distressed assets, arbitrage, macro-trends, and managed futures. Like angel investing, hedge funds are often reserved for investors with significant capital.

4. Managed Futures

Wealth managers, mainly those of hedge funds, use futures (financial obligations for a buyer to purchase an asset or a seller to sell an asset at a predetermined future date) and options (rights to buy or sell an asset at expiration) to diversify among asset classes and mitigate the risk of an existing portfolio. Futures and options provide a way to diversity risk that isn't available through investments in direct equity.

In addition to futures and options, a wealth manager could use other derivatives, such as forward contracts, swaps, and mortgage-backed securities to diversify a portfolio. All of these types of contracts are very complex and have been subject to scrutiny by several government agencies. For a primer on mortgage-backed securities and other derivatives, watch The Big Short.

5. Real Assets

These are firms that focus in the speculation of real assets. By using their expertise in a specific field, such as real estate, wine production, or art appraisal, these companies acquire tangible assets in the hope of gain — but with the obvious risk of loss. Lately, there has been an explosion in investment in luxury and collectible goods of all forms.

How Can You Invest in Alternative Investments?

You can invest directly as an accredited investor or through an exchange traded fund (ETF) or retirement account.

Accredited Investor

Generally, only institutional investors (organizations that invest on behalf of its members) or accredited investors (individual investors or entities that meet income, net worth, asset size, governance status, or professional experience requirements set by the Securities and Exchange Commission) have access to private equity, venture capital, and other types of alternative investments.

Some alternative investment firms may charge accredited investors a membership fee to be able to invest. For example, the Hawaii-based venture capital firm Hawaii Angels charges individual membership fees for out-of-state investors starting at $700 per year.

Chances are that you won't meet the SEC requirements to become an accredited investor. For example, the SEC requires any natural person to have an individual or joint net worth of at least $1 million, or an individual income in excess of $200,000 in each of the two most recent years ($300,000 in case of joint income) and a reasonable expectation of sustaining the same income level in the current year. According to the latest data from the U.S. Census Bureau, the median household income stands at $53,889, which means there aren't many of us who qualify.

Exchange Traded Fund

Individual investors not meeting the SEC requirements can leverage exchange-traded funds (ETFs) to gain exposure to capital invested in alternative investments. For example, the PowerShares Global Listed Private Equity Portfolio ETF and the Proshares Global Listed Private Equity ETF allow you to invest in private equity portfolios.

One key advantage of ETFs is their liquidity. Because they're traded just like stocks, one potential drawback is that there are over 1,400 U.S.-based ETFs, making it difficult for individual investors to pick the "winners." (See also: 8 Ways ETFs Can Put More Money in Your Pocket Than Mutual Funds)

Retirement Account

Your 401K or IRA may already offer you the option to gain exposure to some alternative investments. Many retirement accounts offer a real estate investment trust (REIT) within their available funds for plan holders. A REIT owns or invests in income-producing real estate assets, such as shopping malls, apartment buildings, and warehouses, and in real estate debt, such as mortgages and other types of loans.

Talk with your plan administrator to learn more about your full set of options in your retirement accounts. Some retirement accounts may already offer prospectuses of all funds available in the plan through an online platform that you can access after setting up your account.

The Bottom Line: Invest Carefully in Alternative Investments

All types of alternative investment firms seek extraordinary returns through their expertise within a specific field. A higher rate of return always comes with a higher level of risk, so make sure to only invest in alternative investments when you're fully comfortable with that level of risk.

Depending on your tolerance for risk and total available investment fund, financial advisers suggest investing between 5% and 20% in alternative investments. Less than 5% won't be enough to move the needle in your total portfolio return, and over 20% may be increasing your total portfolio risk beyond that of your desired target.

And don't forget to check the schedule of fees! Whenever evaluating whether an alternative investment is worthwhile, consider the total cost to determine whether or not those investments are suitable to you.

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Silver Bullet of Cash Flow

Ken Kaufman — Sat, 29 Jan 2011 17:29:12 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/the-silver-bullet-of-cash...

It is rare that a day goes by without me hearing from entrepreneurs about cash-flow concerns. Some have a "take-over-the-world" idea, and their lack of venture capital is the only thing holding them back. Others are expanding, and their cash flow just never seems to catch up to growing expenses. Still others are suffering operating losses and need cash to bridge them to profitability. Whatever the exact reason, the need is the same — cash on hand.

Getting funding for business can be tough, whether you're pursuing investors, a bank loan, or bootstrapping via family and friends. But there is a silver bullet that will lead you to the cash you need to fund your business — paying customers.

Yes, the silver bullet really is that simple, with one general disclaimer — you have to have a decent business model that leads to profitability and, ultimately, self-sustainability.

1. Get Funding from Your Customers

Some of them may even be willing to pay you in advance for the products and services they desire. Don’t hesitate to develop your pricing and invoicing strategies to accelerate your cash flow as much as possible. For example, allow customers to pay for one or multiple years of services or products in advance for a modest discount.

2. Add Customers Now, Features Later

A commonality between the bootstrapping and lean-startup movements is this concept: Building out the features of your product or service just enough to start gathering paying customers, and then using profits from those customers to carefully add more features to attract more customers. These companies continue to repeat this cycle, sometimes for years.

3. Customers Can Improve Your Valuation

If you still need cash once you get everything you can directly from your customers, you are in prime position to find additional funds because you have cleared the "proof of concept" stage and broken into the coveted "paying customers" stage of financing a business. Why is it coveted? Because your business-funding options significantly increase at this point.

Why did your funding options increase? Because your risk just went down. Getting individuals or another business to actually part with their hard-earned cash for your product or service is a milestone in your progress. You now represent a more calculated risk, and your valuation goes up as well. In fact, the more satisfied, paying customers you have, the better your valuation. Repeat customers are even better.

4. Friends and Family Will Notice

Friends and family will feel better about financially helping you, and you will feel better about taking their money, knowing your chances to repay the money are now much improved.

5. Business Plan Competitions Are in the Bag

Have you ever been to a business plan competition? Have you noticed who usually wins? It’s usually one of the plans that has become a real business and has real, paying customers. And business plan competitions can be a great source of start-up and growth capital, both in terms of the prize money and free services as well as the financing relationships that usually follow the winners.

6. Angel Investors Love Customer Feedback

Did you know that angel-investor due diligence usually focuses on customer feedback? Angels know your business plan is a best guess and your financial projections are so full of not-yet-validated assumptions that it is obsolete within hours of its completion. They will ask for a list of your customers, and they’ll likely call a bunch of them. Paying customers are the best way to convince investors to open their checkbooks along with an “A” management team, a strong business model, and a definable and sizeable target market.

7. Banks Are More Likely to Loan

Banks like to loan money to companies with paying customers — the more the better. Whether the bank is financing working capital (which is often collateralized by the amount of money your current customers owe you) or equipment, they almost never make a loan to a company without paying customers.

8. Even More Financing Options Are Open to You

Paying customers can create several other financing options, including invoice factoring, PO financing, inventory financing, and more. Without paying customers, none of those would even be an option.

9. Investors Will Notice

Private equity, venture capital, and even IPO investments are primarily about one thing — paying customers. Without them and the ability to demonstrate how the investment will directly and exponentially increase the volume of paying customers, those deals usually fall apart very quickly.

So, You Need Cash?

If you need cash, then you should ask yourself this one question: “Am I doing everything I can to keep my paying customers and acquire new ones?” If you hesitate in any way to answer yes, then you should start your financing strategies there with specific focus on reasons number one and two above. If you still need money once you’ve exhausted those options, then you can focus on reasons three through nine and leverage your paying customers into additional financing.

If that still isn’t enough cash for you to succeed, then you may need to revisit the viability of your business idea and model. I just don’t know of many companies that have run out of cash because they have too many paying customers; their failure is usually the result of another problem with their management or execution of their business plan and financing strategies.

This article is from Ken Kaufman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Characteristics Angel Investors Expect

Thursday Bram — Sun, 26 Sep 2010 19:20:23 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/the-characteristics-angel...

Angel investment can make a world of difference for a startup. An angel investor, by definition, steps in and provides funding that can get an entrepreneur from the point where personal savings, friends, and family can no longer support a company's growth to when he can land venture capital. Bridging that gap can be the hardest part in the life cycle of a startup. Still, finding an angel investor and convincing him to invest in your business is not always a simple proposition. Even after you pique the interest of an investor, you have to convince him of the value of investing in your entrepreneurial efforts. That means having the characteristics an angel investor is looking for as well as a great business model.

What Angel Investors Look For

Most angel investors only answer to themselves when making a decision, so they can easily make a gut judgment or rely on a characteristic that seems unrelated to being an entrepreneur. It's crucial to get to know anyone you're considering approaching about investing in your business at this level. Learn what their individual considerations are when it comes to deciding on an investment.

It can take an uncommon set of characteristics to interest an angel investor, especially when you consider that many startups looking for this level of funding have few numbers to actually prove their value to angel investors. David Rose, the founder and chairman of New York Angels, notes, "There is no one thing that will 'make' an angel investment, because all the stars need to align (or at least be close to alignment) for an entrepreneur to be the one out of 40 applicants who gets funded."

Robert Okabe has been an angel investor for over a decade. He points to two categories of characteristics that investors look for: objective and subjective. In both cases, there are negative characteristics that will send an investor running and positive characteristics that will quickly interest them.

Okabe says, "Objective failures include unrealistic financial models that have unachievable margins or grossly understated expenses, fantastic company valuations, not being able to identify incumbent market leaders and/or competitors, sloppiness (misspelling, numbers that don't add up). Objective plus signs are basically the opposite — signs include items such as realistic assessments of competition, well-thought out cost assumptions, etc." You have to have a realistic view of your market as well as in-depth knowledge of it. Many angel investors also give preference to entrepreneurs who already have startup experience.

Subjective characteristics are typically those that an angel investor might see when interacting with an entrepreneur. "The biggest positive is an entrepreneur who enters the discussion with a collaborative mindset and a willingness to admit what he doesn't know," says Okabe, while noting negative characteristics like arrogance as a counterpoint.

Rose points out, "There are quite a few things that by themselves can knock you out of the box as a potential angel investment...Some of them are immediate deal killers. They include:

Integrity — if we get the slightest whiff of anything that's not quite right, or any experience anyone has ever had with you where you didn't play straight, or any one single thing, no matter how tiny, where we find you lied to us...you're out the door;
Unrealistic valuation — if you have a pre-revenue startup company and tell me that you plan to raise $1 million for 10 percent ownership (thus valuing your own piece before my investment at $9 million) I'll know that we're too far apart to even have a discussion;
Unrealistic projections — similarly, if you tell me that your revenues will grow from $0 this year to $50 million in your first year of operations, I'll tell you to go out and get some real world experience first;
Me-too plans — if you're coming to me with a plan that's a simple copy of another company already in the space, and can't immediately help me see why yours is significantly different, I'll pass."

You may be able to develop the positive characteristics an investor is looking for as well as shed as any negative characteristics that might be a concern. Be wary of tailoring yourself too closely to what one individual investor is looking for, of course, but these characteristics are generally good.

Asking for a Second Chance

It's entirely possible that you'll develop the positive characteristics an angel investor is looking for after he's already passed. It's not out of the question to ask for a second chance. Okabe says, "I generally won't second guess myself in the short-term (under six months). Entrepreneurs can rarely achieve the type of high impact milestone that can turn me around in that period of time. I do try to be respectful enough of the entrepreneurs so I can have access to a second chance if they prove me wrong over the medium term (nine to 18 months). After about two years both the company and its valuation are generally beyond the point where I can be a meaningful investor."

The characteristics that can make a difference on a second look, according to Rose, is if an entrepreneur can show that he's met projections, landed a few major customers, or if another investor has put in money and can explain why.

However, Okabe suggests some caution if you find that an investor keeps asking you to meet new requirements before he'll consider you. "Entrepreneurs should beware of investors who string them along with multiple promises to re-assess their investment once milestones are reached (call me once you have a demo, followed by call me when your product is in beta, then let me know when you've signed X customers)."

This article is from Thursday Bram of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Do Fools Rush in where Angels Fear to Tread?

Tom Harnish — Mon, 07 Jun 2010 03:35:45 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/do-fools-rush-in-where-an...

Angel investors backed away from seed and startup investments last year, according to the University of New Hampshire's Center for Venture Research. In 2009, ten percent less private capital, compared to 2008, went to bright ideas or new companies.

On the other hand, despite deep recession and record unemployment, more new businesses were started in 2009 than any year since 1995, according to the Kauffman Foundation.

Are people foolish to start new businesses in this economic climate? Is that why angels are afraid to invest in them?

Why Start A New Business When Times Are Tough?

Record unemployment motivated many people to start about 500,000 new businesses each month last year. People who were laid off, who worked for shaky companies, or who were just exasperated had to find a way to keep groceries on the table. With few job openings and lots of people looking, creating their own job seemed to be a good strategy.

Entrepreneurship was highest among 35 to 44-year-olds, but 55 to 64-year-olds showed the largest increase in new business building, continuing a two-year trend.

Oklahoma and Montana had the busiest beavers, but entrepreneurs in Texas and Idaho were close behind. Alabama, Mississippi, Nebraska, Pennsylvania, and Minnesota produced the fewest new businesses per capita. According to the Kauffman study's author, Robert W. Fairlie, "Entrepreneurial activity generally is highest in western and southern states, and lowest in the Midwestern and northeastern states." Houston had the highest entrepreneurial rate in 2009; Seattle had the lowest rate.

While necessity may be the mother of invention, that's not the only reason people start businesses. And it's not the only requirement for success.

I had dinner a few nights ago with the co-founder of Alpine Access. When data-over-voice communications became possible, he realized that people and computers could use a single phone line at the same time. He understood that technology and future developments could make it possible to build an all-virtual call center. The company he started ten years ago has 2800 agents working from home in 35 states, and is poised to reach $100 million in revenue. His company is no start-up, but angels and venture firms are knocking on the door almost daily.

With new business starts at an all time high, regardless of the motivation, you'd think shopping for good investments would be easier. But private investors aren't going there.

Why Are Angels Afraid of Start-ups?

Seed and startup stage companies have never been a favorite of investors for one obvious reason: They're risky. While the failure rate is nowhere near the mythical "9 out of 10 don't last a year" — it's closer to 6 out of 10 — the fact is that companies that have been around a while are more likely to produce a return on the investor's dollar.

Another reason investment in startups is down is because investors may have to put more money into companies they've already added to their portfolio. Declining consumer spending and lower revenue can quickly deplete a company's cash reserves if expenses aren't or can't be controlled. In a sense, investors are forced to double down to protect their investment.

Finally, angels' tolerance for risk change during a down economy, too. Their own income may be lower for the same reason as everyone else's, and as savvy investors they may decide this is a good time to play their cards close to their vest.

Entrepreneurship Drives the Economy

The sad part about the decline in startup investment is that entrepreneurship drives our economy, yet recent stimulus programs essentially ignored angels and the companies they invest in.

Even in the '81-'82 recession about half of all small business owners thought conditions would improve. Today, only 11% do, which is a huge difference. Business owners and investors, almost unanimously, just don't think things are going to get better any time soon. With that mindset, even people who have money aren't going to spend it.

The scary part is that the people in Washington with no private market experience may continue to try to create jobs (Stimulus II?) by laying on more debt and only making things worse. Instead, legislation that will support new business startups and encourage private investment could fuel the engine that makes our country run.

This article is from Tom Harnish of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Things You Should Never Tell Investors

Ken Kaufman — Thu, 15 Apr 2010 19:33:44 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/5-things-you-should-never...

Are you hoping to raise some capital to get your business off the ground? Are you anxiously waiting for the day when your bank account is flush with newly-injected investor cash? Are you thinking about presenting your business plan to a group of Angel Investors or Venture Capitalists?

If you answered yes to any of these questions, then this is something you need to hear. According to Scott Shane's book The Illusions of Entrepreneurship, not very many start-up companies receive funding from formal investors. His research indicates that less than one-tenth of one percent of all start-ups receives VC money, accounting for less than 2% of all small business financing. And, only 13.4% of the angel investors are actually accredited, meaning most angels are actually informal investors, not high-profile sophisticated investors who mandate fancy presentations, well-coiffed business plans, and attractive 10X returns. (10X refers to a return of at least 10 times the investor's initial investment.)

This data is not meant to scare you away from seeking the funding you need, but it should clarify that a very small minority of new businesses ever find themselves in front of sophisticated investors. In case you ever find yourself trying to convince one or more of them that your business is worthy of their cash, here are five common faux-pas you should never say in your presentation.

1. What do you mean by cap table?

First of all, this refers to your capitalization table. It defines all of the current shareholders/members of your company and projects how that will change with this and future rounds of financing. It was not too long ago that an up-and-coming business received a coveted invitation to present to an angel group. Upon investigation, the company had sold some stock to friends and family in the early days but had no idea how much stock each investor currently held. To make matters worse, there were no legal documents formalizing these transactions. If a potential investor learns of this, they will most likely turn and run the other direction.

2. If we could just capture 1% of the market...

Hopefully you have never heard anyone say this about the potential of their business. If a sophisticated investor hears it, they will shut down any further interest in your business. They may appear to be listening, but they are not. Why? If an entrepreneur has not bothered to do enough research to figure out what a realistic market penetration would be, then investors will draw the conclusion that it is not worth their time or their money. Trying to justify the potential of your business with such a statement is really saying that you are going to short-cut in every other aspect of your business, and that is not an attractive quality to someone who is going to trust you with their money. Know your market, segment it into as much detail as possible, and show them some realistic assumptions and why you think you will achieve them.

3. The first thing we plan to do with your investment is hire a bunch of attorneys and really expensive consultants.

Oh, this will make them cringe. They may even get a little red in the face as they recall the amounts of their money that have been wasted on non-growth-oriented expenditures. Investors want their money to be used to grow the company. They want their money to help develop new products or improve the penetration of your company's current products. Sure, some legal and other professional fees are necessary and value-added, and you may even need to use a little of the investment to handle those things. But ultimately the investors need to see how their money will help the company grow and increase the value of their investment.

4. I'm not planning on hiring a management team. I will do it all myself.

Why would you ever say this? You have a big ego? You can't let go of control? Or, perhaps you have so little vision of your company that you cannot even imagine the days when you will need help running your business? This last question is exactly what potential investors think when they hear this statement. Besides being the most common mistake made, I have never seen a company with this attitude get funded. Every company that breaks free from their start-up roots gets to a point where it is too much for one person to manage. Show some vision, humility, and savvy by thinking about your company at 10 to 20 times its current size. Then build an organization chart of what experience and talent you will need around you to build that successful business. This is not a sign of weakness -- it is actually what the investors need to hear and see from you!

5. I'm not sure what my company is worth.

When you walk into Wal-Mart you don't see price tags that say: "We're not sure how much to charge you for this." So why would you want to say this about your business? You have something to sell: equity in your business. Know what it is worth (implying you do some homework and have some logic behind your number) and ask for that price. Sophisticated investors will always do their due diligence to see if they agree with your asking price (and they never will), but they will lose interest if you haven't put enough thought into your company to try and figure out what it is worth.

This is a guest post by Ken Kaufman. Ken focuses his professional efforts on helping entrepreneurs maximize cash flow, improve profits, and obtain clarity.

This article is from Ken Kaufman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

16 Ways To Get Money For Your Business

Julie Rains — Sat, 14 Jun 2008 18:26:38 +0000

Former kid entrepreneur, co-founder of iContact (a leading on-demand email marketing service) while an undergraduate student at the University of North Carolina at Chapel Hill, and now Chief Executive Officer of iContact, Ryan Allis, has lots of ideas for getting money to grow a business. He’s got real-world experience, which he shares in his book Zero to One Million: How I Built A Company to $1 Million in Sales... And How You Can, Too.

Using Ryan's expertise as a guide, here are ways, simple to sophisticated, to get money for your business:

Use money from a regular job, part-time job, one-time gig, or contract work.
Generate cash from your business and re-invest it (also known as bootstrapping).
Get a personal loan from family members or friends (iContact bought server equipment through a loan from a friend).
Request a loan using Prosper.
Set up a credit line with corporate credit cards (iContact has 2 credit cards with a combined $160,000 of credit available).
Use personal credit cards (I know someone who funded her business, a chain of tanning salons, with credit cards. She paid teaser rates only and kept track of when promotional offers ended, and when she needed to find a new card.)
Borrow from your bank or credit union, getting a secured loan using your personal assets (such as your home) as collateral.
Get a loan secured by business assets such as inventory, real estate, or equipment.
Find a co-signer for a loan if you don’t have assets to use as collateral.
Get a bank loan backed or guaranteed by the Small Business Administration; also see this article on SBA-backed loans from Business Week. (iContact got a credit line from Bank of America backed by the SBA.)
Factor your accounts receivable; that is sell your unpaid invoices to a factor who will pay you part of what you are owed now, and more when the full amount is collected, less a fee, helping your cash to flow.
Structure a convertible debt deal. This Inc. article describes how a software company owner designed a deal that paid its lenders a guaranteed interest rate and then paid back the principal after 5 years if the debt had not been converted to an ownership stake in the company. (iContact raised $500,000 by issuing convertible debt through a deal with NC IDEA).
Work with a venture bank such as Silicon Valley Bank. These banks may offer a variety of funding methods and tend to work with companies that have strong potential for explosive growth and profitability. (iContact has a $1 million credit line with Square 1 Bank).
Issue corporate bonds. A company may structure its own deal with a stated interest rate and term length, and then sell the debt instrument to investors.
Find angel investors who will give you money in exchange for a equity in your business (common stock or preferred stock).
Raise capital from a venture capital (VC) firm. This process requires much dialogue and culminates in a term sheet or details of the agreement prepared by the VC firm and a valuation of the company, which will ultimately determine the percentage ownership the VC firm will have in your business. (iContact received $5.35 million in funds from Updata Partners.)

Ryan recommends starting the getting-money process by preparing a business plan and pro forma financial statements (projections of profit & loss statements and cash flow). The financial information gives business owners, lenders, and investors an idea of how much money is needed, what the money will be used for, the projected return, and how much risk is involved.

The amount of money needed is a key factor in deciding the approach for finding money: for example (according to a table in the book), if you're looking for $1,000 to $25,000, then you'll likely get a bank loan or money from friends; if you need $25,000 to $250,000, a bank loan or angel investors are the way to go; if you need $250,000 to $1 million, go to a small VC firm or a network of angel investors; for more than $1 million, see a VC firm. All of these techniques require building solid relationships over a period of time and being able to demonstrate that you know what you're doing.

Note: I received Zero to One Million in exchange for a book review. This post focuses on one chapter, "Raise Funding or Bootstrap." Ryan shares general business principles but also provides insight into what it takes to build a high-value technology company. Fairly complex ideas, such as pre-money valuations of companies seeking venture capital, are covered but the book is easy to read and written in a conversational manner.

This article is from Julie Rains of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: