Generally, startups have some funds reserved on their own; nevertheless, they require more funds from other sources. Other than borrowing from banks or loan organizations, enterprises also opt for other sources such as venture capital. But, a real conundrum had been innovation. Innovation drives present-day startup businesses, and investors are often skeptical about going off the tradition and supporting that new idea. Hence, to date, innovation and finance were loosely coupled. Thanks to the new generation and Industry 4.0 revolution that is not the case anymore. Today, a gamut of business ideas are supported and funded by innovative capital ventures. But, we shall talk about how the present finance ecosystem would affect the startup landscape.
Over the last decade, the initial-stage capitals for startups have changed by all accounts –be it an accelerator, angel investor, or crowdfunding. The present-day emerging capital sources affect the dynamics of early-stage venturing for any startup. Angel investors and crowdfund communities look up to a diverse flair of startups, and they are more dispersed geographically, which wasn’t the case with a traditional venture capital investor. With ample investors available, enterprises have more options to choose from.
Special startup programs that offer educational mentorship to initial startup founders are known as accelerators. Such accelerators are looked at as a solid foundation for startups of all kinds to boost the regional economy. Cohen sets a great example to prove the efficiency of an accelerator program. Many such instances are on the market, which proves the latest finance ecosystem is ‘more accepted’ worldwide due to its flexibility, potentiality, and quickness.
The accelerators with rich domain experience in niche industries shall provide better learning experiences for their startups in their pre-entry business venture, especially the local entrepreneurial ambitions.
If VCs are inclined toward emphasizing later-stage finance support, angel investors are coupled with accelerators to fill the gap in early-stage capitals. Not just in the United States, individual investors and the angel community have been a major part of financing early-stage enterprises. As angel investors have their own money into the project, they are least affected by issues faced by agencies (documented with VC funds).
According to Patrick Gouhin, the CEO of the Angel Capital Association, many angel investing companies are run by former successful entrepreneurs who are keen to pay back to the community that helped them improve their portfolio once. It is evident that in California and New England, VC investments contribute over 60% of the total investment in the US and Canada, but on the other hand, angel investors are more prevalent throughout regions.
Lately, angel investors have shown marked improvement in their performance to help survive startups not only in the US but also all over the world (Lerner, J., Schoar, A., Sokolinski, S., & Wilson, K. (2018). The globalization of angel investments: Evidence across countries. Journal of Financial Economics, 127(1), 1-20.).
From the same reference, an analysis of thirteen angel groups in twenty-one countries showed that new enterprises financed by angels proved a 14-23% higher survival chances for initial 1.5-3 years with employment growth by 40%. Even further, the international angel investors show more robust effects and follow finance support for the startup portfolio as compared to those in the United States. It simply means that such investing options are spread worldwide and producing impressive results.
Enterprises have a unique way to democratize the capital for the entrepreneurial ecosystem. The contemporary crowd funding process has expelled old gatekeepers that hinder the startup funding; moreover, it has also reduced costs to access capital by enabling startups to broader funding communities. On the contrary, traditional funding systems such as VCs were likely to back startups with demographics, qualifications, and professional features similar to theirs. Hence, it has availed ample opportunities to underrepresented firms to gain capital (Greenberg, J., & Mollick, E. (2017). Activist choice homophily and the crowdfunding of female founders. Administrative Science Quarterly, 62(2), 341-374). The significant positive change crowdfunding has brought is that crowdfunding in a particular region catches other finance options to the region. Hence, a successful crowdfunding drive would pull and help VCs local enterprises and startups overcome their previous unfamiliarity with the funding campaigns.
Though recent research on funding startups has shown impressive efficiency of budding forms to capitalize the business on an early stage, it is still uncertain how startups would select the capital provider suitable to them. Experts say it is unclear which type of funding can assure better learning and foolproof growth to budding entrepreneurs.
To avoid undercapitalization, startups should alert themselves while planning the venture. The fiasco can be prevented by careful planning. Here are a few factors to mention –
Flaws in blueprint: ‘Just do it’ may work for Nike, but not every startup. Failing to identify business expenses could be a significant setback for an entrepreneur as it is one of the top challenges that startups faces. In fact, in many unfortunate cases, a business shuts even before it officially opens. A comprehensive business plan helps project finance, and one should consider various costs such as operation, emergency, fees and taxes, and marketing. If the projection hints that the breakeven would take a considerable period, it is time to rethink.
Unforeseen outflow: Even after a foolproof plan, if you don’t consider unexpected expenses, they would shatter your venture. While you may never know the ‘type’ of such unexpected strikes, you may at least keep the plan B open for rescue.
Delays: A lot of startups experience delays in getting started. Such delays may result from one or many mistakes. Licenses, permits, and other legal issues are to be sorted out much before the launching date. Such impediments are often out of entrepreneurs’ control. Thus, keeping a domain and legal expert in the plan is always helpful.
Overreliance: It is not uncommon for startups to overrely on credits. The interests, if not paid in time, would take a mammoth monster avatar and engulf your startup like a piece of meat. Multiple sources of income and financial support may help keep this nightmare at bay.
The sure thing is that you need a polished business blueprint and a clear insight by holding meetings and conversations with domain and legal experts and investors. By evaluating different fund sources, you finally get the finance to keep your business up and running.
A professionally engaged blogger, an entertainer, dancer, tech critic, movie buff and a quick learner with an impressive personality! I work as a Senior Process Specialist at Topdevelopers.co as I can readily solve business problems by analyzing the overall process. I’m also good at building a better rapport with people!