The past couple of years have seen what can be said to be a boom in technology startups, technology startup competitions and funding activity related to technology startups.
Amidst all this activity, the bottom line is that these tups staare businesses and they should be run as such irrespective of the hype.
Let’s look at the various ways technology startup entrepreneurs can fund their businesses and the possible consequences of each method.
Technology Startup Entrepreneurs need to be aware of the options they have and choose one that is suitable to their business and future plans.
boot·strap [adjective] - relying entirely on one’s efforts and resources.
Bootstrapping is probably the most basic way to fund a business, and probably the safest.
It entails a startup founder using his own cash to fund the business and going forward using the business’ own cashflows to fund expansion. In this manner the startup ends up being self-sustaining although it runs the risk of not expanding when it needs to due to lack of resources and capital, that is the downside.
The upside, one of a few, is that should the business fail the founder only loses his money and doesn’t have investors and bankers to repay nor does he lose his reputation with “the suits” as he lost no one money.
Many technology startups hardly even consider bootstrapping because it requires being resourceful and a lot of hard work and perseverance. Also, with the abundance of technology startup competitions and investors promising capital even for ideas that haven’t even been tested and used by consumers, most choose the easy way out.
seed capital [noun] - a small amount of capital required to finance the researchnecessary to produce a business plan for a new company.
This type of money or capital is akin to planting a seed.
In this case the seed investor (although models will differ) will offer technology startup entrepreneur a relatively small amount of money (as compared to what will be required to fully fund the business) to “develop the business idea”. In exchange, the seed investor will acquire a small percentage in shareholding in the technology startup and in most cases, hope to “flip” this when the technology startup raises more funding in future.
Funding to “develop the business idea” can involve a myriad of things ranging from market research, business plan / case development to developing a prototype product or service.
What is important is that the entrepreneur establish and be clear on the terms of engagement as this type of investor is typically in it for the short-term, i.e. as soon as it is established that the business is viable and can raise many times more funding in return increasing the valuation of the company, he will sell his shareholding for a profit.
The upside of this is that the entrepreneur gets to test his business idea using someone else’s money, should it fail, in most cases he is left with no liabilities. Also, important to note is that seed investors tend to also get involved in “developing and testing the business idea”.
angel investor [noun] - an investor in a business venture, esp one in its early stages
The next level and type of funding is Angel Investors.
The phrase is somewhat deceiving, these individuals don’t offer funding in return for nothing, they usually request shareholding in return for capital provided and tend to be more passive as far as involvement in the business is concerned.
They don’t offer the type of money venture capitalists offer but offer (typically) more than what a technology startup entrepreneur would raise through bootstrapping or as seed capital because they are usually wealthy individuals or families who are looking to diversify their investments.
‘Angels” get involved in the early stages of a business but typically not as early as seed investors.
They’d want to see some sort of research and plan in place, perhaps a pilot or prototype before even investing.
Like seed investors, as soon as the business raises further rounds of capital that is many times more than what they invested, they are likely to sell at a profit as their interest is not operational but purely profit and investment based.
The advantage for the technology startup entrepreneur is that the angel investor gives you access to the amount of funding that you’d only get from the “Sharks” with less stringent terms in exchange for shareholding.
venture capital [noun] – funds invested in a new business enterprise.
As a technology startup entrepreneur you’ve probably heard of “Growth funding round” or “Series A funding round”, this is when a venture capital company invests in your business after all the previously mentioned rounds of funding (especially seed funding) with the sole aim of realising a profit either through the sale of the company or an Initial Public Offering (IPO).
IPO’s are not that common for technology startups in Africa so the most likely outcome after the “adventurous capitalists” have invested in your company is that they will sell it later, for a profit.
Unlike the “Angels”, venture capitalists tend to bring technical and managerial experience and skills along with capital to the companies they invest in. VC’s mainly invest in novel or niche technology startup businesses or technology startups that have a different business model. They also usually run various venture funds where they manage other people’s money to invest in such businesses.
“Adventurous Capitalists” are in the BIG MONEY game. As an entrepreneur, you just need to ensure that their goals and aims, as well as terms, are aligned with what you think of your business and where you see it going as the experience can be overwhelming given the money they are likely to invest and the skills they will bring on board. The upside is when they do call you, know that your business is relatively unique and has a relatively good chance of making it big.
Simply put these are the banks, the loan “sharks”.
The model here is simple, you provide collateral and they provide you money at an interest rate. Should you fail to make payments, you can kiss your business goodbye. This option should really be the last possible option funding your business as it is expensive (interest.
As a technology startup entrepreneur, the above are typically your options in funding your business, evaluate each option carefully and choose one that suits your long term plans and your business.
Cover Image Credit: Jeremy Jenum