A Project Has An Initial Cash Flow Of 600 Startups Must Choose Financing Models Wisely: Bootstrapping versus Angels versus VCs

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Startups Must Choose Financing Models Wisely: Bootstrapping versus Angels versus VCs

When a startup decides to expand using bootstrapping, angels, or VCs, it is often mistakenly assumed that money is the only choice. Many advise founders to get the best deal and complete the process as quickly as possible.

However, it should be noted that the financing that startups receive determines the company’s strategic direction and potential for success.

Finance models have many tangible policy implications. When early-stage startups choose a finance model, they limit themselves to a limited range of strategic options. When choosing a finance model, I think it’s best to forget about money for a moment and focus thoughtfully on strategy.

In order to make the best possible decisions regarding your financing and actual strategic direction, startups need to be put in the best possible position from day one.

Every startup must complete a series of successful prototyping that analyzes the low-cost, high-impact business model, revenue model, pricing model, and sales strategy that best suits their needs. [problem-solving product or service] and its users.

The next step is to assess the costs of implementation and implementation of specific business models for startups. 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 base of sales to generate free cash flow that funds additional sales efforts.

Finally, when moving into alpha and beta testing, it is important to simultaneously test your solution with a well-thought-out business model, revenue model, pricing model, and sales strategy. If you decide to chase market share, forget about the business model and give away your product in the interim, it’s a good idea to enable users to purchase upgrades, subscriptions or add-ons. Otherwise, you will never know how many users are committed or inactive.

A bootstrap finance model requires a laser beam focus on product development, cost control, sales and profitability. Bootstrapping is similar to the concept of intelligent design. You’re building a company from the ground up and ready to let the natural growth cycle happen. You are interested in keeping your company highly malleable, ready to change direction according to market demands. You are an opportunist. Bootstrapping has low initial risks, but long-term risks are high as you may lose significant market share when other companies choose to go big. Even if you have hip solutions, great brands and a cult-like user base, bootstrappers run the risk of being relegated to a sub-par market position.

The angel finance model requires smooth investor relations, high user growth rates, and strategic direction leading to highly potential mergers or acquisitions. Angel financing is similar to evolutionary theory. Angel’s funds act as an agent for startups during their evolution cycle to infuse additional capital through a potential Series A round or angels.

Despite opinions to the contrary, angel investors are not charities, hoards of free money, or blind speculators looking for gold in quicksand. Angels need to make successful investments to sustain their investment activity. Angel financing involves moderate short-term and moderate long-term risk.

One of the biggest pitfalls in startup/angel relationships is misunderstanding of roles and responsibilities. Angels essentially invest in the conceptual rendering of an early-stage solution. Angels have to avoid getting involved in day-to-day management. Their only concern is to come up with a workable solution [problem-solving product or service] Which is ready to grow from prototype to alpha tests/beta tests. The clock is ticking slowly with angels, but it’s ticking. Several rounds of financing and mergers or acquisitions are expected in 3-5 years. An angel usually expects a minimum return on investment of at least 200% thereafter.

The VC finance model can be simply and best understood as a troika consisting of seed stage VC funding, early stage VC funding and late stage VC funding. Seed stage VCs invest after evaluating an early prototype or hearing a particularly interesting pitch. Early-stage VCs invest with the goal of increasing a startup’s value and market position in anticipation of future financing. Late-stage VCs invest in startups to obtain additional funding while preparing for an eventual IPO or M&A. At every stage of startups’ evolution, VCs invest in the expectation that exponential growth and a successful M&A or IPO will confirm the risk.

The VC financing model forces startups to continuously grow at a rapid pace. Such growth involves large amounts of risk and costly labor, advertising, and technological infrastructure development. Risks in the short term include technology and labor. Startups must scale quickly to ensure quality user interactions, while also prioritizing their web sites and customer service systems to handle exponential growth in users. Startups face a potential shortage of highly skilled programmers and project managers. Long-term risks are market-based. While managing such rapid expansion, startups must remain stable in the market and proactively respond to changing tastes and needs of their users.

In this scenario, the focus is on increasing market share and brand recognition. Typically, VCs expect a net return on investment of at least 600%-1000%. Startups funded by VCs are always expected to become market leaders. A VC funded software company that has survived multiple rounds of financing and is headed for M&A or an IPO can spend $50,000,000 or more over a two-year period.

It is important to note that while there are numerous examples of bootstrapped and angel financed companies surviving and thriving, successful large-scale VC investments in the Web 2.0 era are rare. A startup does not need funding for operations. And there is a more patient attitude on the part of startup founders who appear committed to running their companies for the long term before seeking VC funding.

Many startups will become sustainable in the near future using all three financing models. Many startup founders will decide to rely on only one financing model throughout their company’s embryonic period. For example, it is possible for a startup to exit a successful M&A or IPO through the sole means of bootstrapping. In contrast, many startups will use multiple rounds of angel investment or VC funding to reach success.

Furthermore, others will undoubtedly find success by mixing and matching financing models. For example, a startup may initially secure angel investment then choose to bootstrap or accept VC funding for further expansion and progress towards exit.

It is better to be free from any preconceived notions or prejudices. When it comes time to make a financing model decision, just remember that you are making an imperative strategic decision. Make the best decisions relative to the market conditions and financial conditions your company is facing at that time.

More essays are viewable at: http://www.geraldjoseph.typepad.com

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