While start-ups and tech go hand in hand, startups have never been confined to the parameters of a single industry. Through the centuries, start-ups have become a staple of capitalist societies, celebrating the entrepreneurial spirit and marking the inception of new business endeavours. While the landscape of industries in which they exist has drastically transformed over the years, one aspect remains true to start-ups that only a few manage to weather the storm – flourishing into trusted, established companies.
A common challenge that start-ups tend to face is the inability to secure sound funding. In an effort to facilitate a smooth take off, a myriad of establishments and organisations have risen in the recent years to offer supporting funding solutions to new entrepreneurs. Nevertheless, there are some traditional approaches of securing early-stage funding that have prevailed over time and are still favoured today. A classic method of funding new ventures, commonly preferred amongst entrepreneurs who have previously pursued a career and have thus accumulated capital, is self-funding. Without doubt, self-funding is perhaps one of the safest routes to opt for when launching a business given that it reduces the founder’s dependence on external partners and sources.
Another source of funding frequently explored by entrepreneurs is within their close circles of friends and family. This approach heavily relies on the reputation of the founder within their network, as well as on the investment capacity of said individuals. For a more strategic route, one could opt for an external funding partner. I would always advise that the deciding factor while choosing a partner should be more than merely a monetary incentive, as the risk often outweighs the short-term financial benefit. When considering a partner, the main driver should always be to look for someone with complementary skills and experiences that balance one’s own.
“Find an investor who is aligned with you, not one who wants you to follow their lead.”
Jakson Peters
Depending on the start-up’s business model, founders can also look to their suppliers for funding. This is commonly observed in retailing sector and can be an excellent source of capital, as long as this partnership does not hamper the founder/company’s relationship with other suppliers. Lastly, banking institutions offer an array of financing solutions ranging from credit card receivables to short term loans. Although banks often serve as the most expensive sources of funding, they play a crucial role when there is a momentary need for cash.
In recent years, the advent of new technology brought a new dawn in the nature and business models of start-ups, and with it came new expectations for early stage funding. Suddenly, not only were we witnessing purely online players, but even traditional brick-and-mortar stores needed to have an online presence in order to succeed; a transition that triggered the need for high upfront financing.
Gradually, the market developed a new wave of establishments geared at supporting startups to overcome their financial challenges. Private equity, along with variations such as seed capital, angel investors and venture capital are the most widely sought out forms of funding – all of which precede a possible IPO.
Do’s and Don’ts
To sum this up, I’ve narrowed it down to a few key pointers that I’ve learnt along the way on the dos and don’ts when it comes to funding a startup:
- DO know your business model like the back of your hand. Have a clear understanding of your market potential as well as how much capital is required to grow your business for at least the next 12-18 months.
- DO have clear KPIs set in place to track the development of your business against your business plan and end-goal.
- DO target investors that have more to offer than just capital. Consider the investor’s experience with the business model and market you are looking to penetrate, the quality of their portfolio network and their reputation – are they a long-term player? Do they provide support but also leave you with freedom of choice? Before getting into a partnership with an external entity on individual, I would strongly advise budding entrepreneurs to retrospect and first understand their plan and goal as thoroughly as they can, and then venture out to find the suitable fit.
- DON’T chase the money – to reiterate the above, investors play a much bigger role than simply funding business. An investor that will invest at the highest valuation may not necessarily be the best fit for your business and could possibly cause potential hinderances to your growth.
- DON’T dilute yourself excessively to the point where you are unable to enjoy the fruit of your labour. Be careful to not put yourself in a situation where you’re working around the clock, yet unable to benefit significantly.
- DON’T have a transactional mindset with investors – you want them to be your partners and support you through your journey, and it is key that you look at them as long-term companions.
- DON’T put different potential investors in an auction to extract the most – think long term.
Most importantly, always remember that you are the founder, and the company is your vision. Find an investor that is aligned with you, not one that wants you to follow their lead. That being said, advice from investors is invaluable; be open and flexible to adjust your plan.