The world is filled with startups. India alone had at least 50,000 in 2018. At least 300 million of these companies launch each year. Meanwhile, at nearly 65%, the United States has the highest number of unicorns or billion-dollar startups.
But why do most people hear only a few of them? Besides the fact that those who make it to the headlines invest in excellent PR services for tech companies, most of these businesses will eventually fail.
According to Small Business Administration (SBA), 90% of these fledgling companies won’t make it. At least 20% will fold in their first year. In some cases, the decline from being promising can be horrendous. Remember Theranos?
One of the most common reasons is money. To be more specific, many tech startups are costly, but companies don’t have access to cash flow or capital. To make it worse, the average burn rate can be as high as $100,000 a month.
The good news is startups now have more options when it comes to funding—as long as they get smart at it. Here are some sources of assets and the best time to use them:
1. Bootstrapping
Bootstrapping is the process of funding a project or a business using the available sources. These can include savings, liquidation of assets like houses and cars, or donations from friends and family.
Others may maximize their existing resources. For instance, friends and family may serve as the pioneering employees since labor may be cheaper or even free. They can also become the business’s first investors.
Such was the case of Alibaba. Before Soft Bank infused a lot of cash into it, the initial founders were Jack Ma and over 15 of his friends. The same goes for Facebook.
When to Consider Bootstrapping: The best time to bootstrap is at the beginning of the startup. It prevents the business from incurring a significant debt before it can even perform product development, research, and marketing.
2. Series Funding
However, some tech startups can grow fast, which means they need to add bigger capital more quickly. Bootstrapping will no longer cut it as the team’s available resources may be severely limited.
Thus, most turn into series funding. This type of funding is different from seed funding as investors are no longer banking on a mere idea. They now want to make sure the founders have a well-defined business model, especially when it comes to revenue generation and sustainability.
Tech startups that want to participate in series funding go through different stages: A, B, and C. The purpose for each varies.
For instance, series A is for tech startups that are about to scale. It means they already have a solid track record and are ready to expand their products and customer base. Those that make it to series C funding are stable companies prepped for massive growth. The money may be used to acquire other businesses, particularly small or new startups.
When to Consider Series Funding: It is ideal once the startup is ready for takeoff or growth.
3. Angel Investors
While joining series funding helps businesses gain access to huge sums of money, not everyone can participate. Some may also be wary about the amount of control these equity ventures may want for the business.
A possible alternative is to look for an angel investor. This may refer to a high-net-worth individual or business that wants to invest in a startup in exchange for ownership shares or a percentage of the revenue.
Unlike equity ventures that invest using pooled money, angel investors use their resources. For this reason, the investment may be considerably less than what a company can get from series funding. However, the expected rate of return may be lower.
When to Consider an Angel Investor: Angel investors are the best partners for startups that don’t need a lot of additional money and don’t want to deal with high returns. Experts also believe that these individuals are more risk-takers than venture capitalists since they often act alone and understand the nature of businesses.
4. Business Loan
Unlike series funders and angel investors, often, banks don’t consider a tech startup’s potential when assessing loan applications. They consider the business’s capacity to pay. Thus, the amount may be commensurate to the available assets the company has.
Business loans are the easiest to get, and tech startups retain full ownership or control over their operations. They also need not worry about achieving a particular rate of return. Instead, they provide repayments, the amount of which usually stays the same for years.
On the downside, startups may find themselves paying off loans even before they can generate a profit. Banks may also have the option to get the collateral in case of a default.
When to Consider a Business Loan: Tech startups can apply for a business loan when they need emergency funding, and their cash requirement is not high.
To realize a dream means investing in resources. When what’s available is not enough, startups can get help from these four options.
