In this article, we are going to talk a little bit about the financial problems of startups. Financial problems are something that most startups inevitably face. For this reason, it is essential for any business to have a general understanding of this concept and how it works. Numerous articles have been written on the Startup financial cycle issues of startups and companies and their financing, which helps to understand this issue better. However, without having basic information, it will not be very effective to go into detail.
A startup emerges when an entrepreneur monitors an opportunity and moves toward using it. Usually the first step in this direction is to find a new idea and design, or find a new way to use existing ideas or, in the simplest case, use existing ideas and methods in a market that is not yet saturated. These three are the starting points for most startups. But it is vain to have a starting point without a plan to move forward. That’s why every entrepreneur needs a blueprint in the next step to achieve the goal. It can be said that until the entrepreneurs reach noticeable amount of sales, positive feedback from the market and profitability, they have not been able to turn their good initial idea into a successful business. To clarify the futility of the idea without a plan, we can refer to the situation that most inventors in today’s world experience. In most cases, inventors’ share is only 4% of sales of a product, and the rest goes to those who will produce, market and distribute it. This well illustrates the importance of implementing an idea over the value of the idea itself.
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What can be done to turn an idea into a successful business?
This is probably the most common question entrepreneurs should ask themselves. Just search the internet to see the millions of articles written about it. However, most of this material is motivational, emotional, supportive, general, and possibly about the importance of perseverance and effort. But the thing that is important to us is the financial issue of startups. So in this article, we will only look at the financial aspect of turning an idea into a business and look for a way to overcome these obstacles.
Financing and economic aspects of a startup
The first thing we need to point out is that we are not going to talk about motivation, perseverance, luck, beliefs, and so on. The only thing that is our criterion for success is money and the economic aspect of the business and everything that affects it. Every business needs initial investment. Usually, this initial investment will include huge amounts of money.
It all starts with the money that an entrepreneur invests. Usually at the beginning of the work, the costs are not so high. As a result, it’s not hard to find people who are willing to giving you their money in the hope of getting more capital. So the first step in implementing an idea is external financing. These people are willing to invest in a company that does not yet exist. These people will generally become the founders of the company, who are usually family members, friends, acquaintances, and so on.
Startup financial cycle in their embryonic stage
In this way, the initial Startup financial cycle is successful and acquaintances and friends will come to help the entrepreneur. Usually at this stage the entrepreneur will choose strategic partners that will help to better understand the idea and implement it in the early stages. For example, this person could be a computer-savvy person (about Internet and computer-related businesses). The strategic partner usually does not help much in terms of financing the company, but instead give their skills to the company and play the complementary role of the company’s founder. This person, like the entrepreneur and the initial investor, is essential for the implementation of ideas.
In general, the company in this stage, goes through its embryonic period. Its investors are heavily limited in financing, and the company’s situation is highly unstable and the return on investment is associated with high risk. Typically, the initial investments and expertise of strategic partners are all put on to build prototypes, packages, create business models and business plans. Therefore, at the end of this stage, the company must be able to access the market and from there proceed to the market. Fortunately, the first steps in the market are inexpensive. Also being on the market will be a confirmation of the real efficiency of the idea and the implemented plan.
Startup financial cycle : When should we look for venture capital in order to finance?
After the initial development phase, the business enters the startup phase. This is the point at which the company makes its first sale and intends to increase sales and expand the business. At this stage, venture capital or entrepreneurial investment will be very useful. In addition to financing, entrepreneurial investors connect you to distribution channels. Of course, these companies will expect a high return on investment in return for their services. So it is better to go for risky investments, just when you have good and reliable sales statistics.
At this stage, the business is still at high risk, except that the risk of the initial idea has now become a business risk. This means that the risk of not selling products has now changed into a risk of inadequate efficiency and enough profits.
Eventually, startups will be successful when they can make good use of entrepreneurial investment and powerful distribution channels and experience monthly increasing sales. Venture capital and high income will ensure the company’s financing in the future, which is essential for continuing the work. In this way, after a while, the startup successfully enters the market and leaves the startup stage.
Of course, the issue of starting a business doesn’t end there, and there are still a lot of matters with startups and their financial aspects. Experts in the Retiba Group have mastered all of these issues and details, and based on their lots of years of experience in valuing and analyzing startups, and defining strategy for them, they can make up for the lack of information, time, or experience of entrepreneurs and lead them through getting the best possible result, regarding the current situation.
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Your startup has crossed Death Valley, and it has had at least 2 funding rounds? Discounted Cash Flows (DCF)
Your startup has had at least one funding round, you are advised to use Multiples method for valuation.
Your startup is at pre-seed and seed funding rounds, you are advised to use the Score Cards Method, Risk Factors Summation method to value your startup.