Funding Options for Startups
Talent is everything. Demand for skilled talent is fiercer than ever, with the gap in supply widening. At Wahl and Case we sit in-between the most innovative, disruptive technology companies as our clients on one side, and an exceptional network of talent on the other. Each day we try to solve a key problem for our customers: how to acquire and retain the best talent, to grow their business. In the world of startups – be it mobile, analytics, ed technology, gaming, apps, monetization, advertising technology, e-commerce, enterprise, shared economy, or financial technology — we’re playing witness to the technological and digital revolution. As such, we gain valuable insights as to why companies are successful or failing. It’s one of the (many) perks to our job. We intend to pioneer a series of articles, many based on presentations and interviews with thought leaders in our primary markets in Tokyo and San Francisco, to share the insights we get to see in our world of talent acquisition in the tech startup space. Our goal? To share valuable information that is typically locked inside just a few peoples’ heads. Hopefully, the nuggets of wisdom we share can support a better decision for a critical career move, or even help newly founded startups make their way through the precipitous cliffs of growing a business.
We kick off with some useful definitions of funding terminology for the startup world!
Bootstrapped or Self-funded
Someone who starts a company without bringing in investment from an outside party. It generally results in a slower growth rate. The CEO tends to own most or all of the company; there is no outside influence. The strongest advantage is that the founder(s) retain total control.
Angel Investors
Wealthy people who like to invest in young businesses (and are not accountable to their own investors). This is someone who goes to a casino to win, but also enjoys playing the game. Angel investors often like to be involved with startups and be part of the “scene”.
Venture Capital
Known as “risk capital” in Germany. Venture capitalists (VC’s) work on the basis of “high risk, high return”. Venture Capitalists are accountable to their own investors, called limited partners or “LPs”. VC’s have a clear desire to “exit” their investments with a positive return to their investors. VCs can be quite active in your business — they take part ownership of your business and can often appoint an advisor or board member to oversee the management of the company and help to set its direction.
Bank Loan
Whether it is to help with cash flow or for investment purposes, taking out a loan is often seen as being less robust for high growth businesses that need to lose a lot of money in order to grow fast. Usually this is a low risk approach and it means low returns for the bank. The advantage here is that you don’t lose any ownership, and hence maintain full autonomy and control of your business (assuming you pay back the loan). You are unlikely to be approved for a bank loan at the seed stage of the business as the bank will want to see a history of revenue and profit. This is an option for a more developed startup.
IPO
An initial public offering, or the public sale of shares in a company and its listing on a stock exchange such as the Tokyo Stock Exchange or NASDAQ in New York. The main reason companies choose the IPO route is to raise money to fuel growth and provide liquidity or an “exit” to investors.
Venture Capital – Dissected
There is a misconception that startups simply receive money from venture capitals. In actuality, a sale is taking place. Venture capitalists offer money in return for a (sometimes significant) share of the business. The idea being that the startup uses this investment to grow the business. If you choose this path, there is no going back. You are in “high growth, high return” territory! Investments from venture capital firms usually presume a 7+ year or so relationship with the startup. After that, VCs expect to be able to sell out, or “exit”. They are generally looking for a tenfold (10x) return on their initial investment in that time frame.
How does an “exit” work? This can be a number of things, though the main ones are: the company is acquired by another firm or there is a public share sale (IPO).
What VC firms tend to avoid are so-called “lifestyle businesses”, or companies which are not solely focused on growth. These companies may be more interested in generating steady margins to support the lifestyle of the owner rather than high growth and market dominance.
