Startup 101: What Emerging Companies Need to Know Today
With today’s market volatility and venture capital investors tightening the purse strings, it’s more important than ever for startup companies to have a good understanding of the key challenges and issues they face today. So what are the key challenges for today’s startups, and what do startups need to know today to move forward successfully?
A recent report released by KPMG International and CB Insights highlights many of the issues facing startups today. According to the report, so far in 2016, a larger number of startups are taking lower valuations this year than those entering the “unicorn club” with billion dollar valuations. The report also indicated that in the first quarter of 2016, there were 19 downgrades, which may also cause other startups to wait to raise new money if they anticipate having to take cuts themselves. Funding across the board also dropped 8 percent globally compared with the previous quarter.
As one of the major reasons startups fail is lack of cash flow, emerging companies should carefully consider alternatives to the traditional routes to raise money. There are many funding options available to emerging companies outside venture capital investors. Entrepreneurs must consider all viable funding options for their business such as private equity investment, corporate partnering, crowd funding, angel investors, incubators, or mezzanine financing. Today, wealthy individuals are even infusing startups with funding well beyond the angel stage. There are many options, and all possible avenues must be considered.
It is no longer enough to have a great idea – we are far past the days of VC’s pouring money into startups with no proven track record. Investors want more of a sure thing and are not as willing to take major risks. This means that startups must provide a compelling amount of information to potential investors or demonstrate progress in product development or user traction before they will consider providing funding. Putting together a solid “pitch” backed up with tangible data will be key for today’s startups.
As funding is not as readily available as it once was, startups must also be willing to operate on a much leaner budget. Consider what is truly necessary in terms of office space, employees, marketing, development, technology – what is really critical to advancing the company and what is really something that is nice to have. Trimming off the excess costs is essential to keeping an emerging company afloat in the long run.
Of course, these are just a few of the issues facing the startups of today. Every emerging company needs to carefully consider the state of the market, what kind of funding is available and what that means for their success as they realize their vision.
David C. Lee is a Partner at VLP. His practice focuses on the representation of high-growth, venture-backed emerging companies, and the investors who fund and support such companies. He has over twenty years of experience handling corporate formation issues, venture capital financings, mergers and acquisitions, public offerings, public company securities law, technology licensing transactions and employment and executive compensation matters.Share
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