The Pitfalls And Potential Of Startups

For many entrepreneurs, starting a business begins with the desire to control their destiny and an idea that they believe can fulfill an unmet need in the marketplace. Invariably, the first step is to develop a business plan — including growth prospects and development costs — that will attract investors with the necessary capital needed for expansion. Further down the line there may be an initial public offering (IPO) or a merger and acquisition (M&A).

As it happens, the current pool of capital available to startups may be larger and more diverse than ever before. The 2016  Bank of America Private Bank Insights on Wealth and Worth® survey found that more than one-third of business owners used their own or their family’s savings, almost one-fifth used a personal or business credit card, and nearly a quarter took advantage of a loan from a bank or financial institution. About 6% took advantage of the recent trend of crowd-funding — small contributions typically made online by multiple contributors — and close to one in 10 accepted funding from venture capital (VC) firms¹.

Consequences of Capital

It’s important to understand the possible consequences of accepting — or not accepting — outside funding methods like the following:

• BOOTSTRAP If you delay accepting third-party capital, you can call the shots and drive your plan forward. Yet this kind of extended “bootstrapping” may limit the expansion potential for your product or client base.
• VENTURE CAPITAL If you plan to obtain venture capital, be sure to perform due diligence on the prospective firms. Determine how much control they seek versus the contribution they are willing to make, while also assessing the kinds of introductions and connections they may be able to provide.
• IPO or M&A While many companies are waiting to go public due to the availability of capital, doing so can raise a number of concerns — keeping employees engaged and staying above water in the event of a funding downturn, for example.

Passion and Practicality

Entrepreneurship can provide a person the opportunity to pursue something that they are passionate about, but just as vital as that passion is the grasp and understanding of the practical aspects — considerations of capital-raising and liquidity during the growth cycle, for example — of running a company. Making informed decisions can help develop the product or service into a market leader rather than letting it languish as a great idea with inadequate funding.

Consult with your advisor to understand what funding approach makes the most sense given your circumstances.