Since I have been following the subject of startups
and funding, something which I find interesting because of the financing
involved, I have been reading that although there are many ideas from
entrepreneurs the problem arises when it comes to seeking funding.
Financing is the major obstacle to overcome and fears
many entrepreneurs even though the idea is in place. There are four means by
which startups can seek funding for their new venture. Of course before going
out to seek funding, one means is by your own funds. We discussed this in our
prior articles so have a look, we called it bootstrapping.
But suppose one does not have own funds available. The
first is borrowing from family and friends. Pitching, or selling your idea is
vital in any stage of the funding process, and is key in attracting investors
to invest in your idea. Here it plays the same role. Seeking funding from
relatives and friend must also have an agreement detailing the loan amount, any
interest involved and repayment installments, as well as possible consequences
for nonpayment. It is similar to having a business plan.
The second is custom financing, a process by which you
get the money upfront for the goods or services from customers, and then
deliver it at a stipulated period of time. This is an idea which might be
tailored toward specific needs.
The third means of seeking funding is by purchase and
order financing. It is a funding option for startups that need cash to fill
orders. This is specifically true for startups that have past the seed funding
stage, may have used all the funding available from the first stage, and are in
need of financing due to cash flow squeeze. So instead of the company having to
turn down further orders, it uses this method to pay a supplier of another
company for goods. It can also be thought of as opening up a credit line.
Another advantage is that it is certainly easier to obtain than bank financing.
The only important thing that matters is the creditworthiness of the one who
provides the financing.
The fourth method is crowdfunding, which is soliciting
funding from individual investors via a vast network by the use of a platform.
It is the use of small amounts of capital from a large number of investors. The
idea is that it expands the pool of investors from whom funds can be raised. In
the US crowdfunding is restricted on who is allowed to fund a new business,
since it entails high risk.
An interesting article appeared this week in the “The
Globe and Mail”, about “Canadian startups grow, local venture capital
funding dries up”. The article states that Canadian startup companies in
technology have attracted large amounts of financing, there is more money in
the startup phase, but there is lack of funding in the medium size companies at
the startup phase. The article mentions that companies are willing to provide
more funding to startup companies in the series A funding process. On the other
hand, there is lack of funding when it comes to technology companies in the
second round funding process.
The reasoning behind the unwillingness to provide
financing to startups at the second round is due to the fact that, startups
begin earning revenue and need subsequent growth funding. “The Globe and Mail” sight
Vancouver based Yaletown venture partners, who say that there are two Canadian
companies that will finance a single deal: Georgian partners in Toronto and
Omers ventures of Ontario. Omers, is a municipal employees retirement pension
fund. It has $430 million assets under management, and has financed nine deals
for more than $20 million.
Bill T. Alexandratos
Billnyc60@gmail.com
