Raising money from investors is considered an undeniable success: now, the startup has the funds to fulfill all the intended goals.
How to Distinguish a Startup from a Small Business?
The concept of “startup” is often used incorrectly. Someone calls any new business that way; others understand a new Internet project as a startup. In fact, there is a very significant difference. A startup is a temporary form of organization that is always looking for a reproducible and scalable business model. The idea is developed from scratch, and the main goal of a startup is to find sources of profit.
Taking an investment round as a measure of success is one of the most common mistakes most startups make. After that, the team, as a rule, raises its salary, rents a solid office, hires stellar specialists – and then simply disappears from view, as the money raised has run out and the goals have not been achieved.
The Importance of Funding for Startups
Startup funding is usually associated with venture capital. In reality, venture capital funds make up only a small percentage of funding. Many startups are funded by personal debt, loans, and investments from friends and family. Deciding how to fund a business can be tricky in part because of the variety of funding options available. Each type of financial support has its own risks and benefits for the business and its founders.
Many factors influence the transformation of an idea into a viable business, the main one being sufficient funding. At the start of the project, the founders’ own funds can go into action: savings, money from relatives, friends, and like-minded people. But in most cases, this amount of funds is not enough or only enough to implement the first steps. A key task for a startup is to find sources of funding.
The financial instrument is one of the leading forms of early investment. A loan is considered convertible, in which the investor acquires the right to demand its repayment in the future in one of the following ways:
- through the return of invested funds with interest;
- through the transfer of a share in the authorized capital of a startup or the issue of shares that are transferred to an investor or sold at a discount.
What Are the Most Important Startup Benefits from Raising Money?
The exact raising money from a startup will vary depending on the specifics of the business: biotech companies and companies selling material technology will be judged on technical or regulatory achievement, and software companies will need to have significant growth in production and revenue. For example, if there is a fundraiser for a film, the authors can promise everyone who has invested in this project free tickets to the premiere after the film is released.
Among the most crucial startup benefits from raising money are:
- It can receive financial benefits constantly in the form of dividends or one-time – when selling a startup (exit, or “exit”).
- For large companies, buying a startup is a convenient way to enter a new market for themselves. It can take a lot of time to develop your own product – it’s easier to buy a ready-made project with a team.
- Sometimes large companies invest in “serial entrepreneurs”, top managers, and experienced teams that have already launched several successful startups. As a rule, this is done for a specific task.