For the lay mind, it is easy to wonder why startups are always in search of some funding or the other. Why don’t they go the old-fashioned way of bootstrapping, using up savings, using personal assets to get bank loans, and selling personal assets to raise capital?
To answer this question, we would start first with what is a startup?
A startup, in its simplest explanation, is a company that is built to grow fast. It is not just one of those businesses people start to stay self-employed, recycle their funds or keep at a minimal growth stage for long. Startups, as we have come to know them, are most techy but there is no rule to this. Moreover, we are in a period of high technological advancement, so most businesses are wont to rely on tech to a large extent.
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Importantly, startup companies will require lots of funds (what we call capital) to purchase equipment, rent office space, hire staff, experts and consultants, and so on. As the business gets started, the startup will also need funds to move from one stage of growth to the other. They will need funds to move from the point of servicing 10 customers, to servicing 100 customers, up to 1000 customers, and so on.
At every stage, funds will be needed. And no matter how much money the entrepreneur has at the beginning of the business, he will come to a point when he has a business project or expansion that demands more than his cash flow can handle. That might be the point where he needs to raise funding.
The initial capital a company will raise to get its operations off the ground is what we generally refer to as “seed” capital, and though a significant number of investors bootstrap, there are several others who will also need to raise funding from day 1. Besides the initial capital, there is a lot of ‘burn capital’ needed if the startup is going to grow at the rate expected of it. So there will be other stages of raising funds Series A, Series B, and so on.
Now, the issue of how much funds should be raised at each stage of the business is relative and will depend on what stage the business has come to, what target is hoped to be achieved, and what stage of expansion it is in. A business with 100 customers trying to scale to 1000 will not require the same funds as one looking to scale to 100,000 customers.
While managing the funds is of critical essence to the eventual success of the business, it will not be the focus of this article. However, founders should be careful not to raise fewer funds than they will need at that stage of the business. It will be an indication of poor business management if a startup is looking to raise funds again, barely two or three months after raising some funds.
High-growth companies – which we are referring to as startups – always need some form of capital to sustain their growth pace until they finally achieve profitability. There are very few, if any, startups that successfully bootstrap until they break even and become profitable. Particularly when founders get to the point of hiring key staff into your marketing, sales, business development, and so on, they will realize that they need some more funds to keep this staff sustained until the business becomes profitable.
Where fundraising is concerned, there is good and bad news. Here is the bad news. The process of raising funds can be complex, difficult, unnecessarily long, and require a lot of patience. A sample of opinions shows that this is the task founders consider to be least appealing. Some admit that raising funds is a “full-time job” in itself, and if not properly managed, you could wake up someday and discover that you left the business to suffer while you were devoting 100% of your time to raising funds.
It is a path every founder will toe at some point but must be done at the right time, and structured right so that it does not affect the startup operations, especially when there is just one founder. If there are two founders, you could have one focus on keeping the business going, while another focuses on raising funds.
The good news, however, is that there is a lot of funds out there simply looking for the right startups to invest in. We will talk more about funds in subsequent posts.