Thriving without investments in the post-COVID era
Startups raising big funds over the years and collective months have become a major point of celebration. Startups that have raised funds have been put under the spotlight and are at the centre of conversations and major headlines.
Too often, the fundraising element of a startup’s journey is given so much applause that it often masquerades the desired outcome of that startup, which is building a successful business, constant innovation of their products, and building a profitable and sustainable business model.
Entrepreneurs should be applauded not just for raising funds but also for the value, innovation and passion they create with their service or product. To some extent, yes, raising capital is a growth indicator that validates the growth of startups.
But, CB Insights-conducted research showcased how only 29 percent of startup failures can be attributed to them not raising capital or because they have run out of cash. If we take a closer look at the CB Insights’ report, the other 71 percent of a startup’s failure is attributed to the startup pioneering a product that is not needed by the market, hiring of a faulty team, cost and pricing issues, etc. Clearly indicative of how other metrics in a business often get overlooked with the fundraise cloud swarming thick in the forefront.
The fuss over fundraise
Raising a huge round of funds should not always be a cause for celebration, although, initially it may bring in freedom to execute an idea, it always comes with strings attached.
If entrepreneurs venture into startup ecosystem with the mindset of only raising funds, then they will have mistakenly set themselves up for giving up more of their venture than they bargained for by the time they reach series B or series C.
Especially with the onset of the pandemic, large and average ticket size funds are no longer available to startups, and average ticket size of those deals across sectors fell by 17.2 percent, a YourStory report showed. If there is one thing this pandemic has taught the startup ecosystem, it is to refine themselves into a lean business with a sharp focus on products and to grow without risking one’s control over their destiny.
Fundings and their impact
When the funds by the entrepreneur are organically grown, they tend to manoeuver through really hard decisions when it comes to expenditure. Through this process, every idea is vetted and tested, so that the decisions will be far more measured and the resultant impact too will determine the startup’s trajectory.
The alternative is to take calculated risks and raise money when there is a clear use for it. Unfortunately, startups so far have been wired to completely rely on funds to survive. Even though a complete bootstrapped startup is unheard of, complete bootstrapping is the kind of reality that is difficult to attain and practice.
Therefore in a world where we become borrowers, what we can practice is becoming strategic and mindful borrowers. For example, laying out a concrete plan in terms of the kind of funds we want to borrow, how much, and from whom. These filters used in the decision heavily impact an entrepreneur’s future choices of financing options and worst-case scenario, their exits.
Each time a business raises money at a valuation higher than itself, it automatically blocks itself from a choice of options. Investors may set their immediate priorities on the startup that may derail or burn them out of their initial vision.
Investors introduce these priorities as they are bound by the payoff from the investment. Raising a huge round of funding may not be an ideal practice for startups to get used to, as they burn off on more than what is required and risk themselves of insolvency, especially if their business model is not highly profitable.
A case for bridge capital finance
Bridge capital finance, also known as bridge financing, is a form of temporary, interposed funding intended to cover a business’s short-term expenses.
For example, global spending on compliance and regulatory expenses is pegged at around $270 billion. For a fintech startup, the complication surrounding compliances is enhanced by the fact that the industry lacks specific guidelines to govern unique and innovative business models. In order to meet these costs, bridge capital financing can be the ideal segue for expenses that early stage fintech startups may have to incur.
Bridge capital financing is the type of financing which is most normally used to fulfil a company's short-term working capital needs. A startup that is in a relatively concrete position may have more options than a seed-stage startup who may have to rely on temporary financing in order to build a product and showcase proof of success.
Bridge funds, if provided at the right time to the startups, can facilitate them enough funding to not only ensure their survival but often to help its product and prepare itself for larger investments, which is a primary consideration for tech startups with complex and unpredictable product design processes.
Some other benefits that bridge financing can provide for early stage startups include:
Swift processing and immediate fund accessibility make bridge financing a sensible option for early stage startups who need an influx to continue in build mode and meet their short-term requirements. While venture funds may have several rounds of due diligence before even offering a fundraise, with bridge financing the duration is significantly shorter.
Bridge financing is smart way for early stage concept stage startups to preserve stake in their organisation for as long as possible as they ready themselves for the market and raise funds without any pressure on performance, enabling them to have full control over their vision coming to life.
Very often, startups may get off to a great beginning; however, they end up meeting an untimely demise because they are not ready enough for venture capital funds to find them interesting but they have already made some headway in terms of building up their idea. It is at this critical stage of survival that bridge financing can turn out to be a boon for startups.
Bridge financing can be an effective way to avoid cash burn in myriad areas and instead shift focus to optimising spends such that it enables the founders to improve operations and ensure smooth functioning in the run up to becoming a mature business and deriving real measurable value.
It also ensures that the business has sound performance metrics based on realistic benchmarks that are not created under any kind of pressure to perform or drive ROI. Instead, it enables entrepreneurs to maintain a steady gaze on building a lasting successful venture that would automatically garner interest and funding when the time is right and at the right value, creating a win-win situation for founders and investors alike.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)