A brief look at how startups can assess the need for external investment channels and other options available.
Making the decision to go on a startup journey is a big one and once you’ve leapt into this journey, as a founder, inevitably you will come to a stage of having to decide whether you need to get external investment to succeed in this journey. This post focuses on exploring briefly how a startup can assess the need for external startup funding, based on need and vision.
As a startup, you will come across many forms of external investment channels. Apart from the known sources such as friends, family and bank loans, there are other specific investment opportunities for startups such as Venture Capitals, Angel Investors, Private Investors and Crowd Funding. These are the most common investment methods available for startups and generally requires some level of interest/dividend payment, equity sharing, exit plans etc.
Whilst before accepting investment from any source, a founder must review the terms and the NEED of such an investment, as all investments will come with a price to pay, there are some important factors to consider.
Why are you looking for external investment?
As a startup, you may require funding for many reasons. Some of the common ones could be for research and development, marketing and promoting, increasing resources and sometimes for operational costs.
Whatever your requirement for capital investment is, as a founder ask yourself the following questions;
What are we going to do with additional funds?
Will this funding increase our revenue? Improve our reach? Increase our client portfolio?
Will this funding help us take the startup to a new level? Are we only able to reach that level with external funding?
If the answers to the above questions are a ‘YES’ and if by getting external investment you can utilize it for methods for increasing your startup revenue, then you should consider this option.
If, however, the answer to the above is either a ‘MAYBE or NO’ and getting external investment is not focused on improving revenue but covering perhaps operational costs, then you must reconsider this option.
All funding options will come with some level of liability. If you cannot cover your ongoing costs with the existing revenue or don’t have a clear plan on using external investments to improve revenues, then how will you pay back the investors?
All funding options will come with some level of liability. If you cannot cover your ongoing costs with the existing revenue or don’t have a clear plan on using external investments to improve revenues, then how will you pay back the investors?
Investment as a means of ‘Obtaining Expertise’
If what you need for your startup to succeed is through increasing your reach, doing more marketing and promoting in new regions, yet you don’t have prior experience or don’t have the right connections, then obtaining marketing expertise in the region as an investment channel could be an option.
This method of investing can be termed as ‘sweat equity, which means you share a portion of the equity in exchange for the services that you get that will be helpful to reach your goal. Most likely, this option will require a smaller portion of equity compared to primary financial investment options and at the same time increase performance, as you’re tapping into expert resources.
Strategic Partnerships
Sometimes the same need can be met through forming strategic partnerships. The benefit of forming such partnerships is that it can be done with multiple parties covering several regions and most likely not require any equity sharing. These partnerships are lucrative as it opens many networks and connections and could possibly help the startup achieve bigger goals than what it set out for originally.
Best of all worlds
The beauty of a startup journey is that these decisions are not required to be made exclusively. A startup may consider combining these options at different stages of the startup journey, based on the need of the time. A combined strategic approach may provide more opportunities, benefits and easy transition when wanting to be a success without losing majority of ownership. What is most important to keep in mind is the need of identifying the real requirement of such an investment and the kind of investors needed to achieve its vision. Investor and founder synergy are crucial for the success of the startup as such spending time getting to know your investors will be valuable, in the long run.
As a founder, the journey to success can be very challenging. From idea to MVP to growth, startups go through many ups and downs and until the right product-market fit is achieved, may require many levels of pivoting. Knowing this and taking the time to reach that product-market fit will help immensely before deciding on the need for external investments. Going into the journey with the expectations of these challenges and having the right mindset to tackle them will set you apart and potentially be the secret of your success.