Financing strategies of enterprises, detailing various funding options and their corresponding origins
In the world of business, funding is the lifeblood that keeps companies thriving. Whether it's for starting a new venture, meeting short-term liquidity needs, financing commercial research, or business expansion, securing the right funding is crucial. But for new companies, the path to funding can be a labyrinthine one.
One of the key challenges new companies face is the impact of economic and policy headwinds. Fewer government grants and contracts, coupled with tariffs, can significantly reduce available funding sources, particularly for deep tech and life sciences startups that rely on scientific advancements and government support.
Another hurdle is the limitations of traditional venture capital (VC) funding. VCs prioritise rapid growth, tech disruption, and high returns, often excluding startups that don't fit the "high-growth" or tech-driven mold. This can marginalise socially-driven businesses and founders who don’t align with VC norms, and securing VC funding often means sacrificing significant equity and control, compromising founders’ original vision.
Cash flow management issues also pose a significant challenge. Late payments from customers, high overhead costs, and insufficient cash reserves can lead to startups running out of cash despite growing revenue, making it harder to sustain operations and attract further funding.
New companies often grapple with difficult decisions between bootstrapping and borrowing. Bootstrapping maintains founder control but may limit growth speed, while loans provide quick capital but increase debt and cash flow risk.
Investor rejections, often due to mistakes in pitch, business model, or approach, are another common obstacle. Identifying and correcting these mistakes is crucial to eventually secure funding.
Funding can be classified by timeframe, with short-term funding (to be paid back within a year or less) and medium to long-term funding (with a maturity date of two years or more). External funding, such as bank loans or capital market funding, is often used for corporate expansion, like establishing new production facilities or acquiring other companies.
Internal funding comes from retained earnings, a portion of the total net income that the company keeps instead of distributing as dividends to shareholders. Other sources of funding include mortgage loans secured by property, corporate bonds, grant funding from charities or governments, crowdfunding, and lines of credit.
Funders compare risks and rates of return before deciding to lend money, and they are often reluctant to invest in high-risk companies without high returns or interest. New companies, with their high risk and lack of a track record of operations and success, often find it difficult to secure funding.
Capital stock refers to the owner adding capital to the company. External funding can come from capital markets through the issuance of bonds or shares. Factoring involves companies selling their invoices to financial institutions for immediate cash.
Equity funders are stock investors, shareholders, or company owners, while debt funders can be creditors, debt securities investors, bondholders, or bond investors. Companies can take various sources to raise funds, with new companies often relying on the injection of funds from the owner.
In conclusion, obtaining funding is a complex task for new companies. They must navigate macroeconomic factors, the restrictive nature of VC models, operational and financial management difficulties, strategic funding method choices, and the need to effectively convince investors of their potential. Despite these challenges, with careful planning, strategic decision-making, and a robust business plan, new companies can secure the funding they need to grow and thrive.
[1] https://www.nature.com/articles/d41586-021-01073-3 [2] https://hbr.org/2016/03/the-case-against-venture-capital [3] https://www.forbes.com/sites/forbescoaches council/2017/04/03/5-reasons-startups-run-out-of-cash/ [4] https://www.entrepreneur.com/article/305462 [5] https://www.forbes.com/sites/forbescoaches council/2017/04/03/5-reasons-startups-run-out-of-cash/
- Navigating the restrictions of traditional venture capital (VC) and the impact of economic and policy headwinds, particularly for deep tech and life sciences startups, can make securing funding a labyrinthine journey for new companies.
- With careful planning, strategic decision-making, and a robust business plan, new companies can secure the right funding to grow and thrive, whether it's for business expansion, meeting short-term liquidity needs, financing commercial research, or starting a new venture.
