If you are an entrepreneur or small business owner and have not yet considered "OPM" Other People's Money, maybe this is a good time to start.
"Other People's Money" is a phrase often used in finance and economics, referring to the practice of using funds that belong to someone else to achieve a financial goal or investment.
In this blog, we'll explore why funding is important for a business, the funding benefits as well as the drawbacks of using OPM in business. We'll also help you learn how to obtain funding for your business by sharing views from an investor perspective.
Why is Funding Important for a Business?
Using external funding can provide several advantages that can significantly drive business growth and in turn help you achieve business success.
Starting a business may require substantial financial resources. Using other people's money allows to access the necessary capital without depleting your personal savings or taking on excessive debt, hence distributing the financial risk associated with your venture.
With additional funding, you can accelerate your business operations, invest in marketing, hire talent, or develop products faster than you could with limited resources.
External funding provides the financial freedom to experiment, innovate, and pivot your business model as needed without the constant pressure of immediate profitability.
"OPM" Other People's Money as a Strategic Move
Using other people's money can be a powerful strategy to mitigate risks, and leverage external expertise for your business.
Securing funding from external sources can serve as a form of validation for your business idea. It demonstrates to the market that others believe in your vision and are willing to invest in it.
Many investors bring valuable experience and networks to the table. By using their money, you often gain access to mentorship and strategic advice that can help steer your startup in the right direction.
Having reputable investors or funding sources can enhance your business credibility. This can improve your chances of attracting customers, partners, and additional investors in the future.
Be Ware of OPM Drawbacks
It's essential to choose the right funding sources and understand the implications of giving away equity or incurring debt. This requires careful consideration of risks and responsibilities, and understanding of dynamics involved, to manage it properly.
Potential for loss of control: Understanding the risks associated with using other people's money and the percent of equity they may get require in exchange for their investment.
Leverage increases financial risk: the use of borrowed funds to increase potential returns on investment leads to increased risks, with clear obligations to repay borrowed funds at specific dates. This can be managed but needs to be clearly understood.
New York University Abu Dhabi Entrepreneur Forum
urBIZassist participated as a panelist to the New York University Abu Dhabi Entrepreneur Forum, with a beautiful cohort of young entrepreneurs.
In partnership with the United States Mission to the UAE, startAD, the Abu Dhabi-based accelerator powered by Tamkeen and anchored at NYU Abu Dhabi opens applications every year within it's Academy of Women Entrepreneurs program. This U.S. Department of State initiative gives enterprising women workshops, knowledge, and presents opportunities to launch and grow their businesses.
How to Obtain Funding for Your Business?
urBIZassist was very honored to present views from an Investor perspective, to support, motivate and align the cohort to consider key elements before pitching to potential investors. These include:
Return is always assessed in relation to the amount of risk the investor is willing and able to take. The risk-return trade off associates low levels of risk with low potential returns, and high levels of risk with an expectation of high potential returns.
The greater the risk, the higher the expected return. This is where the stage of the startup is highly relevant. Early-stage startups tend to come with higher risk. The reality is that the majority of startups fail, and only a small minority go on to become successful. From the investor perspective, that means loosing the investment. Investors tend to look for successful startups, where the potential payoff is enormous, with a higher expectation of return, the earlier the stage.
The holding period allows for the return to materialize before exiting. The Holding Period Return is the total return on the investment over the period for which the asset or portfolio has been held. Why does it matter? because the time of entry and time of exist can make all the difference between a positive or negative return. Investors will look at holding periods based on their risk appetite, and overall portfolio of investments. The average holding period for angels and VCs tends to be long, up to 10+years.
Control and voting rights depends on the risk appetite of the investor. There are a number of mechanisms available to increase the control of one or more groups of shareholders, such as the founders versus investors or all holders of a certain series of stock.
As entrepreneurs begin to consider financing for their startups, understanding structuring of the transaction, control and voting issues, today versus in the future, is key.
Are you starting this journey and looking for a Pitch Deck or startup Kit? Look no further, urBIZassist team of expert have a package for you.
We’re excited to announce urBIZassist monthly Founder Round Table & Speed Networking Webinars. This will help you improve your basic knowledge as an entrepreneur, while connecting with like-minded entrepreneurs.
Ready to take the next step in your business journey? Our team is here to help you get started. Book a free demo with our experts to explore how we can support your vision and set you up for success. Discover tailored solutions and personalized strategies that will give you a head start. Don't wait—reach out today and let's turn your dreams into reality!
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