If you read the content I send you, you already know that I believe in big dreamers and big dreams.
But even big dreams need fuel. In the world of entrepreneurship, this fuel is called capital and cash flow.
In recent times, the venture capital space has flourished, and it has never been as easy as it is today to raise capital for new ventures and startups.
According to the Crunchbase website, between 2006 and 2010, close to 3,200 startups raised seed capital, while a decade later that figure has already grown to 23,000 seed funded startups.
Despite these impressive figures, the truth is that only about 1% of startups succeed in securing funding for their activities. Does this mean that big dreamers need to give up on their big dreams?
Definitely not. Quite to the contrary! Some entrepreneurs even intentionally cease fundraising activities and do not seek more capital from investors.
Why do startups fail even when they actually managed to raise capital?
We are all familiar with the dismal statistic that about 95% of startups fail.
CB Insights analyzed the common causes of failures and found that
- 38% failed because they failed to recruit,
- 35% failed because they failed to prove Product-Market Fit,
- 20% failed because another company with a similar solution overcame them
- And 19% failed because they failed to formulate a sustainable business model.
The truth is that relying on external capital often means that the venture is not required to rely on sales revenue at all, which in turn means that the necessity of finding the solution to solve an existing market problem has not been thoroughly researched. It often means that the business model has not been validated either.
Such a company will often find that when the money from the investors runs out, it also will cause the company to close because it failed to formulate a business model or PMF.
In addition, venture capital funds seek and need a large return on investment, which is a significant consideration that dictates the conduct of entrepreneurs and their ventures. It is at the very center of their decision-making.
The alternatives are Bootstrap companies that have managed to sustain themselves and even grow through the company’s own internal resources to create a profitable activity that demonstrates growth over time.
The huge advantage of such companies is that due to the fact that they were required to harness only their equity in order to survive and grow, they are very efficient.
This is an approach called Lean & Mean, and their dominant feature is the incredibly talented management team.
What are the alternatives?
So first of all, it is important to know that even startups that have not been funded through investment are certainly capable of growing, and can even surpass in performance and financial strength ventures that have been seeded.
When I talk about raising capital, I am referring to Round A investors (private investors), venture capital funds (VCs for short) or private equity funds (Private Equity) who are usually looking for more mature investments, ie companies with much lower risk levels from startups that need to be seeded.
Alternative sources for raising capital are applying for grants (companies like Google, for example, distribute grants), setting up a crowdfunding campaign (the advantage of which is that it is a kind of proof of concept), receiving loans and grants from government authorities and financial institutions), and family and friends.
Surviving without capital and even growing
If you’ve already established your venture and managed to survive the initial phase, and you’re thinking about the next step, then discover that you might not be able to scale up without a fresh injection of capital, here are some directions that can help you:
Creating strategic collaborations – In the Middle Ages, it was customary for aristocratic families to marry their sons and daughters in accordance with commercial and political interests, so families who prospered through the spice and textile trade for example forged relationships with families who served in the military and could protect their businesses.
There is no reason why 21st-century enterprises should not appropriate for themselves this age-old wisdom.
Collaborate with entities that will complement your expertise and assets, for example, a strategic partner in manufacturing, marketing or distribution.
Digitization for marketing processes – today there are free or very low-cost solutions in the field of marketing.
For example, an email marketing campaign, for which most vendors will not be required to pay at all up to a certain amount of hundreds of email addresses.
You can leverage these processes for the benefit of marketing your venture, and migrate part of the sales process to digital automation so that you can save on other resources (e.g. manpower).
Changing the business model – In this context, we can talk about the OEM – Original Equipment Manufacturer which is a well-known way of distributing hardware products.
In this model, a manufacturer produces products that are purchased by another company and sold under its brand name, so that the original manufacturer reduces the need for marketing and sales to end customers, thus saving many sales costs.
In such a manner, the young company distributes its products through a more established or well-established company with a relative advantage and experience in the relevant market and begins to gain a reputation for itself.
All this without the high costs involved in setting up a marketing set-up.
The established company, on the other hand, enjoys unique and high-quality products that are usually manufactured by a specialized company, and when it comes to technological products, they will also usually enjoy innovative and advanced technology.
The issue of capital and cash flow is one of the issues that are at the core of every startup, and it is not by chance that the Burn Rate Index has evolved, because it is the blood that flows in the venture’s arteries and without it, there is no a realistic future.
This index is the rate at which a company burns its capital resources, that is, the money in the bank, which is usually capital raised from investors.
This index expresses the company’s monthly expenses, while on the other hand it also gives an estimate of how much time the company has left to live thanks to its capital, while taking into account the lack of positive cash flow.
If, for example, the company has $2 million in cash, and annually spends about $1,200,000, then its cash burn rate is $100,000, and it has approximately 20 months left to survive.
Usually, the rate will be in monthly terms, in a simple calculation of total expenses divided by the number of months during which the expenditure was made.