Access to funding is one of the key challenge faced by startups. With no collaterals to produce or existing cash flow to show, many startups fail to get loans and are forced to stretch their existing funds to stay operational.
Investors therefore view startups as a high risk investment. The goal of this post is to show you that banks and VCs are not the only source of startup funding.
Listed below are many of the most common funding strategies that new startups should explore.
“Bootstrapping is a way to do something about the problems you have without letting someone else give you permission to do them.” Tom Preson-Werner, co-founder of Github.
Aptly put. Using your personal finance and the operating revenue generated by the new business to manage the affairs of your company is the one and the only way to guard your freedom. The downside is that the risk is entirely on you, and the funding may not be enough to grow as fast as your well-funded competitors.
A few tips on cash management while bootstrapping:
– Take in a co-founder who can bring in some extra capital.
– Select a business model which allows for early generation of cash flow.
– Concentrate only on your core revenue generating activities.
– Launch a crowdfunding campaign. This source of startup funding cannot be termed as debt or equity since it is just your own customers paying you in advance.
– Keep your overheads as low as possible.
Tying up all the cash you have to purchase capital equipment is not such a smart move for a new startup. It hampers business growth potential, and leaves you no room to adjust the cash flow as required.
On the other hand, renting or leasing usually requires only a deposit and a first period payment. The advantages include:
– Frees up working capital for other immediate purposes.
– Maintaining cash reserves.
– Budgetary control.
– Containing costs.
– Rentals / lease payments are fixed throughout a contract and insulate your cash flow against increasing interest rates.
– Timely equipment upgrades.
Payment to suppliers might be the biggest element in your recurring expenses. Vendors typically extend a 30- to 90-day line of credit to trustworthy customers. Though it would be difficult for a new startup to avail of this facility, it could be possible if the vendor is approached through a reference.
If you are able to negotiate good terms with the suppliers (either more credit period or an increased credit limit or both), then you have in effect created free finance to fund your operations through sales revenue and cashflow.
Warning: Do not default. Strictly stick to the terms of the credit. You would be inviting an increase in cost, by way of penalties, in case of any settlement default.
Cash flow can be significantly improved if monies owing to your business are collected fast and without fail. Slow payment cripples business activities, especially in the case of startups who have no reserve cash to manage operations.
Receivables Factoring: This is one of the best ways to avoid the long receivables pitfall. Factoring provides an immediate boost to the cash flow, assists in a smooth financial planning, and has proven valuable to startups short in working capital.
There are many reputed and recognised financing companies to whom you can sell your receivables at a discount of anywhere between 2% to 15%. The onus and risk of collecting the receivables is then on the financing company. In simple words, you have outsourced your sales ledger.
A word of caution: Make sure your pricing is able to absorb the discount percentage.
Managing inventories is a complicated balancing act. While excessive stock can wreck havoc with a company’s financial resources, lack of inventory can also result in delivery delays, partial delivery, order cancellation, etc.
Assess your inventory’s turnaround time to find out how long they remain on the shelf before being sold. A longer shelf period means money tied up which could have been put to more productive use.
Just-in-time (JIT): A prudent inventory management system which increases the efficiency of stock-holding and decreases wastage by receiving inventories on the day it is needed – not a day earlier, not a day later, rather than carrying a large inventory for longer periods.
JIT inventory takes up very little space as it is consumed the day it arrives, minimise stock-holding and eliminates the risk of the inventories going obsolete or getting damaged. Ordering stock as and when required helps in considerable reduction in inventory cost and unlocks the substantial cash tied up in unwanted inventories.
What has been covered so far has been funding strategies which are entirely in your control. Now it is time to cover strategies involving external agencies – VCs, angel investors, PEs, bankers, etc.
Raising external funding comes with a price, because you will no longer remain in full control of your company. Equity investors would definitely want a say in the management and usually require a Board seat. But on the pro side, external funding runs into millions and allow you to grow exponentially.
Please note, this article so far has not said anything about what is jovially called the “FFF” round (Family, Friends, and Fools). This strategy is positioned somewhere between Bootstrapping and external capital. You don’t lose that much control over your business, but you can’t raise the big amount of funds that an external agency can invest.
Mentioned below are few tips to help you with raising external capital:
“When looking for funding, don’t just look for cash. Look for the right people.” – Jodie Fox, Director of Fashion and founder of Shoes of Prey.
Create a fundraising pitch deck and business plan. Do some homework and make a list of the venture firms, angel investors, etc. who are likely to show interest in your idea.
Get hold of a mentor. A person who has travelled the same route, who knows the ins and outs of how things work with the investors and seek his/her guidance. Build a good team. It is difficult to raise external capital if you go to it alone.
Advertise. The more buzz and the people who know about your idea, the better your chances of succeeding. Use social media to convey your idea and connect with potential investors.
Conclusion: Believe in yourself and stick to a plan. Raising startup funding and managing the funds is hard work. I sincerely hope this content makes things easier for you.