Finance for StartupsWritten by Neil on May 2, 2015
Finance for startups is one of those things that many simply do not want to get involved in; because its boring and it conjures up images of accountants, (sorry accountants!) excel spreadsheets, financial ratios and fancy financial jargon that nobody understands. This is enough to give some people any number of gastric disorders.
People would rather talk about technology, sales and products because they’re sexy and easy to understand. But as a startup founder, finance must be a priority on the list of things you will have to understand or you won’t be able to pay your rent and other bills.
With finance, you can accelerate your startup. But If you”re not a lottery winner the chances are that you don’t have the finance to grow your business in the next 12-18 months. Nowadays however, it has never been easier to connect with people who do.
“Lack of money is the root of all evil.” – Mark Twain.
Key questions about the money needed for your startup
- Which funding path do you aspire to take with your company?
- Which funding options will you explore and pursue in the next 6 to 12 months?
- Who do you need an introduction to and who can introduce you?
- Who in your team will lead on fundraising?
Everything gets funded?
Reading TechCrunch you would get the impression that every single startup raises hundreds of millions of dollars. It makes for great reading. In reality however, this is simply not true. In general terms, investors will look at one or two startups out of every 100 business plans they see. They reject the other 98-99%
Startup valuations are going through the roof. Everyone wants to invest in startups these days instead of more traditional investments like oil or gold. There are hundreds of investors with deep, bulging pockets all trying to find the next big thing. We are truly in a startup bubble.
This could be down to FOMA – Fear Of Missing Out. Nobody wants to miss out on the next Facebook, Snapchat or Twitter so they will invest just in case it becomes a big hit.
“You are an entrepreneur not a business person.” – Ajaz Ahmed (@Ajaz_Ahmed)
I recently attended a talk by Ajaz Ahmed, the founder of Freeserve, once the UK”s largest internet company,
His eureka moment came when he bought a computer in PC World and nobody there could tell him how to get on the Internet. After much persuasion, Dixons launched Freeserve in 1998; it became the UK’s largest ISP in 3 months.
It floated 9 months later with a market cap of £1.5bn and entered the FTSE 100 soon after reaching a market cap of 9bn. Freeserve was sold by Dixons to France Telecom for £1.6bn in 2001. He left soon after (They wanted him to learn French!)
He believes the main difference between a businessperson and an entrepreneur is that the entrepreneur possesses the power of observation and empathy. The ability to put yourself in the customer”s shoes is priceless. A business person like a Venture Capitalist will look at the cold hard facts, the balance sheet and the cash flow forecasts, not the vision of your company.
I will do x, y and z once I get my funding!
Obviously, if someone dangles a check for a cool $150,000 in front of you, you would clearly be mad to say no – right? Many people believe that this will solve all their problems. Someone else believes that you are going to be the next Google or Facebook, even without a business model or any revenue to speak of – the dream scenario!
As a general rule you should only need funding if you need to buy an asset that makes money, it’s not really for salaries unless they are going to make you money.
Good investment – 3D printer,
Bad investment – SEO consultant.
Questions to ask before you need funding
According to Seth Godin, one the premier entrepreneurs and marketers of our times, these are the questions you need to ask before you seek funding.
- Do you need money for this startup?
- Does more money increase the chances that you will reach positive cash flow and profitability?
- What assets will the money go to pay for?
- How long before the money invested starts turning into a financial return?
- Do you hope to sell the company?
- For how much?
- What is the gross margin for selling?
- How long will it take you to reach scale?
Given all this, why would an investor choose your offering ahead of all the others that are available?
Do you actually need funding anyway?
For some startups it can hinder development. Having been part of a tech accelerator, I can tell you that the focus at the end of the day is to raise money. Half the program is about raising money.
So it can take away the focus from your product offerings, product/market fit and customer service. Remember, many startups are pre-revenue, and so have no traction and are not even sure if people want their product in the first place!
Founders can have day jobs
Another way to finance a startup is to get a job. According to Paul Graham – co-founder of Y Combinator:
“The best sort of job is a consulting project in which you can build whatever software you wanted to sell as a startup. Then you can gradually transform yourself from a consulting company into a product company, and have your clients pay your development expenses.”
– source http://www.paulgraham.com/startupfunding.html
A conversation needs to happen before you start up your startup, about where the finance is going to come from; because raising funding is one of the main hurdles a startup founder will face. Your startup does not have to generate millions of pounds or dollars to be successful. However, getting your finances in a mess is the quickest and the easiest way to screw your life up. Too much debt and not much in return is a recipe for disaster.