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Seldomlogical: Banking on a Startup loan?

Seldomlogical: Banking on a Startup loan?

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Published by Peter Renshaw
Seldomlogical: Banking on a Startup loan?
"What do people think about NAB's young entrepreneur program?"

Would you think of using a Bank as a source of credit for your Startup? This idea surfaced
recently on the Silicon Beach Startup newsgroup.

Why?

Funding for Startups is a hard problem. The task of securing funding involves both time and effort. A distraction from the task of creating. Why is raising capital so difficult? One word, risk.

New companies without a financial track record are unknown quantities. Avoided by all
except for the most adventurous of lenders. First-time finance is to Startups what drink-
driving is to newly licensed drivers, trouble. For inexperienced Entrepreneurs, even
searching for funding is an alien skill.

New Startup founders show about as much skill in hunting for finance as 21st century man suddenly thrust back into early Africa. Hungry for food, they sometimes see prey, but have no idea how to trap and kill it, let alone know how to look for spoor. A Bank loan may look like an easy kill. But inexperience has it's downside where knowledge means survival. A lack of the right kind of knowledge can mean a quick financial death.
Seldomlogical: Banking on a Startup loan?
"What do people think about NAB's young entrepreneur program?"

Would you think of using a Bank as a source of credit for your Startup? This idea surfaced
recently on the Silicon Beach Startup newsgroup.

Why?

Funding for Startups is a hard problem. The task of securing funding involves both time and effort. A distraction from the task of creating. Why is raising capital so difficult? One word, risk.

New companies without a financial track record are unknown quantities. Avoided by all
except for the most adventurous of lenders. First-time finance is to Startups what drink-
driving is to newly licensed drivers, trouble. For inexperienced Entrepreneurs, even
searching for funding is an alien skill.

New Startup founders show about as much skill in hunting for finance as 21st century man suddenly thrust back into early Africa. Hungry for food, they sometimes see prey, but have no idea how to trap and kill it, let alone know how to look for spoor. A Bank loan may look like an easy kill. But inexperience has it's downside where knowledge means survival. A lack of the right kind of knowledge can mean a quick financial death.

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Published by: Peter Renshaw on Mar 08, 2009
Copyright:Attribution Non-commercial No-derivs

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05/20/2010

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Seldom logical
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Banking on a Startup loan?
Friday, 06 February 2009 04:00 Hrsseldomlogical.comarticlesBanking on a Startup loan?
Summary
What do people think about NAB's young entrepreneur program? [0]Would you think of using a Bank as a source of credit for your Startup? This idea surfacedrecently on the Silicon Beach Startup[1] newsgroup. Why?
Why is this question being asked?
 
 
Search
Seldom logical | Banking on a Startup loan?http://seldomlogical.com/1 of 1108/03/09 18:15
 
Funding for Startups is a hard problem. The task of securing funding involves both time andeffort. A distraction from the task of creating. Why is raising capital so difficult? One word,risk. New companies without a financial track record are unknown quantities. Avoided by allexcept for the most adventurous of lenders. [2] First-time finance is to Startups what drink-driving is to newly licensed drivers, trouble. [3] For inexperienced Entrepreneurs, evensearching for funding is an alien skill. New Startup founders show about as much skill inhunting for finance as 21st century man suddenly thrust back into early Africa. Hungry forfood, they sometimes see prey, but have no idea how to trap and kill it, let alone know howto look for spoor. A Bank loan may look like an easy kill. But inexperience has it's downsidewhere knowledge means survival. A lack of the right kind of knowledge can mean a quickfinancial death.
Harsh financial environment
Founders also have to contend with harsh environments a partial product of localconditions. Geographic location, culture and business climate all play their part defining thequality and sophistication of funding. If you happen to be lucky enough to live in theAmazon Jungle equivalent of finance, Silicon Valley, finance is difficult, but the money isthere. If you live in Australia, the financial equivalent of a desert, finance is almostimpossible because money is scarce. [4] So the act of questioning all potential sources offinance strikes to the heart of the local funding problem. Asking the question, "What dopeople think about NAB's young entrepreneur program?" makes absolute sense.
Why are Banks lending now?
"... NAB's Microenterprise Loan for Start Ups - Learn more about a Melbourne Florist whose business is blossoming with the help of a NAB's Microenterprise Loan ..." [5] 
The real reason I think Banks are targeting non conventional companies right now has lessto do with "social justice" [6] than traditional higher yield customers shedding debt. [7] Debtis now a four letter dirty word in business circles and Banks know it. Banks still have toinvest money and small business at the moment, with its lower finance requirements areprobably the only types of companies that might show promise of growth. With growth,profits may follow. What is a Startup? Startups come in many different shapes and sizes,are they all the same? What kind of Startup are we talking about?
What kind of Startup?
The idea to "start up" a traditional small business say a hair dresser, a book keeping firm ornewsagent is not the same as "Starting up" a new technology based company like Googledid or Scribd is in the process of doing. [8] The definition of a Startup for someone notworking in technology appears to be a woolly interchangeable label applied to anyentrepreneurial or small business activity. By contrast, technology Startups are made up of
Seldom logical | Banking on a Startup loan?http://seldomlogical.com/2 of 1108/03/09 18:15
 
two essential ingredients, new ideas and technology with the caveat of smart peopleworking at the core. What makes technology Startups different and so appealing is the ideathat not all Startups are born equal. Not all Startups are born equal because small teams ofsmart engineers, can aggressively attack hard problems to create new technologies,productively. Technology Startups have the advantages of leverage and barriers of entry,that traditional small business can never emulate. [9]When Corporations shed staff and shrinking economies weed out financially weakbusinesses, more people are exposed to the idea of combining new ideas, risk and effortfor profit. Creating wealth at the forefront in peoples mind. But the language used todescribe the mechanism to create wealth is still playing catch-up. How do Banks describesuch activity? Banks like to use loosly defined, catchy words like "Young Entrepreneur","Start Ups", [10] "Micro Enterprise" and pepper their documents with terms like ENYA. [11]But don't be fooled by the MBA-speak. Indecipherable terms describing what is really asimple set of ideas.
How not to fund Startups
So lets get back to the problem of Entrepreneur funding and Startups. I'm not going toexplore "How to fund Startups" because the existence proof has already been written up. Italso comes with the added benefit of dozens of "guinea pig" technology companies fieldtesting these financial hacks, real-time. [12] I'm more interested in why "taking money froma Bank is not the best way to fund your Startup". To illustrate this idea, I went through thedocuments supplied by the Bank [13] and conducted a quick "thought experiment" into thepotential dangers you might face.
The three Amigos of funding
In this "fictional scenario", you the founder are put into a room with three potential suppliersof finance. You have to decide which is the best source of finance for your Startup. For thelender, the job is to determine the risk to return ratio. Are you worth it? Lets start. Firstthere's John, formally dressed and business-like. A representative from the local "Big"Bank. Next is "Fat Tony" the local "loan shark". Immaculately turned out in an expensiveforeign suit. [14] Finally Joel, a successful technologist turned Angel Investor. Casual inboth dress and manner.John breaks the ice...
JOHN "So I hear you are interested in the 'Microenterprise Loan for Start Ups' our Bank is offering?" FOUNDER "Yep. Funding is so hard to do. Where do you start?" JOHN "Lets go through the steps required. Are you eligible for 'ENYA'?" 
Seldom logical | Banking on a Startup loan?http://seldomlogical.com/3 of 1108/03/09 18:15

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