Venture Capitalism has become a major necessity for start-ups, with it being the only source that allows a start up to transition from and to different stages of it’s life. However there are certain restrictions that come hand in hand with its vitality. Venture capitalism involves professionally managed funds offering start-ups funds for equity. They usually exit when an IPO happens or upon an acquisition. The VCs tend to provide mentorship, which doubles as restrictive advice and at times forces start ups to take directions and scale that the original entrepreneur may not have wanted. Moreover the endeavor of getting the VC’s attention and confidence is a momentous task in itself. Therefore it becomes crucial to develop different asset classes to allow for a greater spectrum of options for nascent start-ups.
There is a spectrum of alternative options, that either involves either developing conventional sources of asset classes and potential sources of funds.
- Bootstrapping: This process involves an entrepreneur using their own finances to facilitate the initial working of start-ups. In order to develop these means further entrepreneurs need to refine their operations to be very cost efficient so they can utilize their revenue growth to fuel future investments as well.
- Crowd funding: Crowd funding involves a business putting its idea on a platform where different individuals pledge different amounts to the success of the project. However crowd funding is highly competitive and the business idea must be fully formed and tested. Moreover crowd funding serves as a dual purpose as marketing as well as financing and gives the entrepreneurs. Crowd Funding platforms are relatively new with their development in their nascent stages in countries like India. To make these avenues feasible there is a need to create awareness.
- Angel investors : Angel investors are individuals who provide one-time boost in the form of funding to a start up. They are usually either family members or friends of the individual. Angel investors are simply informal investors that are more fixated on the growth of the start up as opposed to immediate profit needs. Unlike venture capitalists, angel investors usually invest their own money. Therefore there is a greater propensity of the goals of the investors and the start up being in tandem.
- Private lending: Borrowing money from either conventional banks or specially designed financial institutions that fund small and medium businesses is also an alternative. These loans however increase the firm’s financial risk, which restricts a company’s ability to scale or take operational risks. However loans do come at a benefit of having no dilution of ownership.
This particular alternative needs a lot more refinement and development in reality. Banks often don’t have confidence in new start-ups or lend to them at predatory rates. This more often than not leads to a start up’s demise. However this opens a window of opportunity for us to come up with a different metric for assessing if a start up inspires confidence or not. This new threshold can help actualize this alternative. The right trend can be seen when we see the arrival of institutions specifically deigned to encourage start-ups.
The following are asset classes designed specifically for start ups to help facilitate their growth. However we can look at this issue in another way as well.
The conventional class of financial assets namely equities, bonds, real estate etc. are options a start up does accommodate start-ups. Upon understanding the constraints that lie in this access we can better develop these options as possible alternatives as well.
Start-ups are relatively unknown and often operate under tight liquidity positions. This means that they find it difficult to raise capital from the market. Also the entire procedure of getting listed and the formalities also eliminate these options.
There are a few possible avenues to eliminate these constraints:
- Convertible Bonds: Convertible bonds start as normal bonds with a given interest rate. However after some time investors have the avenue to covert them onto a profit sharing instrument. Start-ups have trouble getting credit due to their lack of credit history. However when they try to raise money by equity they face several problems regarding valuation. This allows start-ups to co-opt best of both these choices by giving lenders the avenue to convert their debt into equity after a certain standard time. This acts as an additional re-assurance and is cheaper than raising money from equity.]
- Start up Stock Market: There has been the starting of a new era of start-ups globally with the arrival of platforms designed specifically to trade share-equivalents of start-ups. This model is still in it’s nascent stages as seen in the start up stock exchange, however if developed gives start-ups access to equity.
Therefore there are several avenues available to start ups other than venture capitalism whether conventional avenues like bootstrapping or new innovations like the convertible bonds. Eventually a start up can also refine it’s own functioning to generate funds by having pre-order option for your products etc. Every different aspect of the start up is capable of being a potential source of financing.
