When a Startup decides to expand using Bootstrapping, Angels or VC, it is incorrectly assumed that this choice is only about money. Many advise founders to take the best deal and finish the process as soon as possible.
However, it should be noted that the type of funding that Startups receive determines the strategic direction of the company and the probability of success.
Financial models have numerous tangible strategic implications. When early-stage startups choose a financial model, they are limited to a narrow range of strategic options. When choosing a Finance Model, I think it is best to momentarily forget about money and focus sensibly on strategy.
In order to make the best possible decisions regarding their funding and de facto strategic direction, Startups have to put themselves in the best possible situation from day one.
Every startup should finish a series of successful prototypes with an analysis of what low-cost, high-impact business models, revenue models, pricing models, and sales strategies are right for their solution. [problem-solving product or service] and its Users.
The next step is for startups to assess the cost of implementing and running particular business models. Startups can choose to self-finance these costs, receive funding from angels, or use a pay-as-you-go strategy where you use a small sales base to generate free cash flow that, in turn, funds additional sales efforts. .
Finally, moving into Alpha and Beta testing, it’s critical to simultaneously test well-thought-out business models, revenue models, pricing models, and sales strategies alongside your solution. If you decide to chase market share, forget about business models, and give your product away in the meantime, it’s still a good idea to allow Users to purchase upgrades, subscriptions, or accessories. Otherwise, you may never know how many users are engaged or passive.
The Bootstrap financial model requires a laser beam focus on product development, cost control, sales, and profit. Bootstrapping is similar to the concept of intelligent design. You are building a company from the bottom up and are willing to allow a naturalistic growth cycle to occur. You are interested in keeping your company very malleable, ready to change direction according to market demands. You are opportunistic. Bootstrapping has lower up-front risks, but higher risks in the long run, as you may lose significant market share while other companies go Big. Bootstrappers risk being relegated to a sub-par market position, even though you probably have modern solutions, the coolest brands, and a cult user base.
The Angel Finance Model requires fluid investor relations, a high User growth rate, and a strategic direction that leads to a highly probable merger or acquisition. Angel financing is similar to evolutionary theory. Angel funds act as a propelling agent to push a Startup into an evolutionary cycle towards a probable Series A round or additional capital injections by Angels.
Despite opinions to the contrary, angel investors are not charities, free money depositories, or blind speculators searching for gold in quicksand. Angels need to make successful investments to sustain their investment activity. Angel financing has a medium-short and medium-long-term risk.
The biggest dilemma in the Startup/Angel relationship is a misunderstanding of roles and responsibilities. Angels essentially invests in conceptual representations of early-stage solutions. Angels should avoid getting involved in daily management. Your only concern should be the completion of a viable solution. [problem-solving product or service] which is ready to grow from prototype to Alpha testing/Beta testing. With Angels, the clock is ticking slowly, but ticking. There is an expectation of multiple rounds of financing and merger or acquisition within 3-5 years. An angel typically expects to earn a post-dilution ROI of at least 200%.
The VC funding model can be simplified and best understood as a troika made up of early-stage VC funding, early-stage VC funding, and late-stage VC funding. Early-stage venture capitalists invest after evaluating an early prototype or hearing a particularly interesting pitch. Early Stage VCs invest with the sole intention of maximizing a startup’s value and market position in anticipation of future funding rounds. Late-stage venture capitalists invest in start-ups seeking additional funding as they prepare for an eventual IPO or mergers and acquisitions. At every stage of a startup’s evolution, venture capitalists invest with the expectation that exponential growth and a successful M&A or initial public offering will justify the risks incurred.
The VC Funding Model forces a startup to grow at an ever-accelerating rate. Such growth carries considerable risk and involves the development of an expensive labor, advertising, and technology infrastructure. In the short term the risks involve technology and labor. The Startup must scale quickly to ensure quality interactions with users, while preparing its websites and customer service systems to handle an exponential increase in Users. The startup also has to deal with a potential shortage of highly-skilled programmers and project managers. Long-term risks are based on the market. While managing such a rapid pace of expansion, the Startup must remain firmly in the market and proactively respond to changes in the tastes and needs of its Users.
Under this scenario, the focus is on expanding market share and brand identity. Typically, venture capitalists expect to earn a net return on investment of at least 600%-1000%. VC-funded startups are always expected to become market leaders. A VC-backed software company that survives multiple funding rounds and heads toward an M&A or IPO can easily spend $50,000,000 or more over a two-year period.
It’s important to note that while there are countless examples of Bootstrapped and Angel-funded companies surviving and thriving, successful large-scale venture capital investments are rare in the Web 2.0 era. Startups do not require as much money to finance their operations. And there’s a more patient attitude on the part of startup founders who seem to be committed to running their companies for long periods of time before seeking venture capital funding.
Many Startups will become sustainable using all three Funding Models in the near future. Many start-up founders will decide early on to rely exclusively on one funding model during the embryonic period of their company. For example, it is possible that a Startup could achieve a successful exit from M&A or IPO through the sole means of Bootstrapping. Conversely, many startups will only use multiple angel investments or multiple rounds of VC funding to achieve success.
Additionally, others will undoubtedly find success by mixing and matching funding models. For example, a startup may initially secure angel investments and then choose Bootstrap or accept venture capital funding to facilitate further expansion and progress toward exit.
It is best to stay free of preconceived notions or biases. When it comes time to make a Funding Model decision, remember that you are making a mandatory strategic decision. Just make the best possible decision based on market conditions and the tax circumstances your business is facing at the time.
MORE ESSAYS CAN BE SEE AT: http://www.geraldjoseph.typepad.com