As a business evolves from a startup to an established company, its financial needs change dramatically. What worked in the early days will only suffice if the business expands. Understanding these economic life cycles enables entrepreneurs to prepare and tailor funding strategies for each growth stage.
Bootstrapping: Scraping By With Ingenuity
Little funding is available when an entrepreneur first conjures up a business idea. Credit history and collateral are in short supply for most startups. And only some investors will back unproven ideas. During these lean bootstrapping years, creativity and cost-consciousness are vital.
Bootstrapping means relying on personal finances and sweat equity to nurture a fledgling business. Many entrepreneurs max out their credit cards, drain savings accounts, and minimise living expenses to direct every possible dollar toward their ventures. They also exploit personal connections to access resources for free or at cost, like pitching friends for makeshift office space or bartering services with other entrepreneurs.
After the initial concept takes shape, an entrepreneur’s full-time attention is invariably required. So, founders often keep their day jobs while working nights and weekends to build their dreams. Non-essential costs are scrutinised and trimmed mercilessly as the focus narrows to gaining a foothold in the chosen market.
Extending Runways Through Frugality
The primary goal during bootstrapping is to extend the runway – delaying the burnout of resources before revenue kicks in. Often, this demands extreme penny-pinching and doing without any creature comforts. Surviving Month-to-month or week-to-week is standard fare for bootstrappers.
Creative cost-cutting is vital during these lean times. For example, bootstrapping founders test concepts directly with prospective customers instead of expensive market research. They build mock landing pages to gauge demand, conduct in-person user interviews, and leverage free surveys to validate their ideas early.
The key is to remain scrappy – testing quickly while eschewing unnecessary expenditures around design, infrastructure, software, employees, etc. Resources should be allocated exclusively toward market validation and product-market fit initially.
Friends, Family & Angels: Betting on Potential
Once initial demand is proven, entrepreneurs can seek outside investors to scale up capabilities. Those closest to the founder, like friends, family and early-employee shareholders, often provide this Seed funding lifeline.
Circles of Trust
Because so little of the business model is proven for startups, Circle of Trust investors must place inordinate weight upon their relationships and instincts in choosing to back such risky ideas.
Often, the initial capital scraped together during Seed rounds comes by cashing in favours, upfronting future family loans/inheritances, or simply appealing to the egos of those who wish to brag about backing hot new ventures. More dollars tend to follow previous dollars in these early rounds. So, an entrepreneur’s charisma and powers of persuasive storytelling hold disproportionate sway in attracting this type of friends-and-family financing.
Venture Capitalists: Professional Investors Dictate the Terms
Professional investors take keen notice as revenue ramps up, providing hard proof that customers genuinely value a product or service. Angels and Venture Capital firms specialise in identifying and rapidly scaling startups against established incumbents in high-growth markets.
These investors perform detailed quantitative and qualitative assessments on startups to gauge disruptive potential and resilience. Product-market fit, founder competence, TAM (total addressable market) size, early traction momentum, and defensibility against competition all factor heavily into funding decisions.
Extreme due diligence allows VCs to calibrate appropriate valuations and stock-option hurdle rates. By investing at crucial inflection points, their portfolio company stock can multiply 10x or greater if aggressive growth continues per forecast. This potential for outsized returns offsets the risk of low single-digit success rates inherent with early-stage investing.
Unlike earlier funding sources, VCs demand significant preferred shares of stock and extensive governance control in return for capital infusions to the scaled growth stage companies – including board seats, protective provisions, and more. So, founders tend only to tap institutional money once necessary to fuel rapid expansion.
Once VCs get involved, they impose new pressures like quarterly milestones tied to tranched investing. A startup must answer to impatient growth-seeking professionals rather than bootstrapping budgets or circles of patient-trusting friends/family.
Public Equity Markets: Maximising Shareholder Value
When all cylinders are firing, and managers fine-tune sustainable business models prepared for global domination, private companies can opt to “go public” – converting to public shareholder ownership by listing on stock exchanges.
Trading Liquidity Unlocks Value
Initially, only insiders could directly cash equity from private startups with the companies themselves. The public listing enables free trading of shares between everyday investors. So, pent-up value becomes tangible wealth overnight by exploiting this liquidity premium.
All the deferred effort, exponential strains on personal lives, and compounding risks shouldered by founders and employees also become freely transferable into lasting financial freedom after public listing.
Furthermore, positions can be exited gracefully while retaining ongoing influence and affluence. Partial sales avoid sudden loss of control needed to see the startup through to full maturity.
So, in addition to raising continued expansion capital, public listing serves as the ultimate entrepreneurial milestone – cementing legacies and crystallising compensation for those who make it through the arduous early stages intact. For more information, click here.