by John Rampton
The headlines have talked about a funding crunch for startups and small businesses, noting far fewer deals are being made. However, that’s not to say that money isn’t available because other large funding deals are still happening. For example, Mattermark recently raised $7.3 million to expand its B2B search and analytics tools while RSK Labs, a Bitcoin blockchain smart contracts startup, had a $1 million seed round. These have all happened in the past two weeks.
For other startups and small businesses, though, venture capital funding has slowed, including the fintech startup industry (financial technology). KPMG and CB Insights conducted a research study, finding that 2015 was a high point in fintech funding with 351 deals and $7.39 billion provided to these startups. The end of 2015 signaled a large drop—up to 30 percent decrease in just the last quarter of 2015—in the number of fintech startup funding deals.
The concern comes on the heels of other news in which startup darlings have missed their financial expectations, causing a drop in their stock. Other startups are willingly selling themselves to larger companies in the hopes of cashing out rather than closing up shop.
Other startups, which were once admired, are now gone, including Pixable, Dine In, Prismatic, and the Bitcoin startup Bonafide. Even the unicorns are stating that they will soon be asking for more money. All of this concerns venture capital firms that are now thinking of proceeding with caution and have put their wallets in their back pockets until there is a better sense of how many of these companies will perform.
Planning for future funding
With these thoughts as a backdrop, you may be wondering where you stand with funding as a small or medium-sized business. There are a number of tactics you can put into place to ease any impact from this recent crunch and still find the necessary funding:
- Consider government and institutional grants, which may be particularly advantageous for a startup in healthcare, technology, aerospace, and other industries that are of interest to government agencies.
- Sign-up for a pitch competition, which offer various money prizes that can serve as a cash injection for your small business. These competitions are often targeted at entrepreneurs, university students, women, minorities, or those in a specific sector or geographic area. These are one of the best ways I've found to get funding.
- Research the availability of small business loans or microloans. These types of loans provide a way to get funding to help you get by. Just remember that these are loans, which means you will have to pay them back. However, they do come with low interest rates. Microloans are available through peer-to-peer online lending platforms and give you an alternative to bank or government business loans. Whatever the type of small business loan you consider getting, do your research and read the small print to be aware of the many fees that are added on to these type of loans.
- Pursue crowdfunding, which is thought to be a funding source that will surpass venture capital funding in 2016, according to a report by Massolution. Their report noted that global crowdfunding raised $16.2 billion in 2014 and is set to raise $34.4 billion in 2015 with further increases predicted for 2016. Of this figure, businesses and entrepreneurs have collected the most from crowdfunding due, in part, to the desire of investors to be part of helping a company be the next big thing. Crowdfunding campaigns can be designed for all business sizes and funding amounts. I've worked with Dreamfunded over the years and love their service.
- Remember the benefits of bootstrapping your business, as noted recently by the Harvard Business Review. Not only does it force you to get at what you do quickly, but you also retain control over your business, partners, and how the money is spent. Bootstrapping also teaches you some valuable skills. For example, it teaches you how to improvise when you have little money to work with, pushing you to take the, “do more with less,” adage very seriously. This careful handling of money and assets becomes a skill that you can continue to apply to your business forever, even after you have more cash flow. Learning the true value of money helps to ensure you stay lean and efficient.
These are just a few of the ways that a small business can still get funded. While recent research illustrates that more small businesses have the ability to tap into these available funding sources, some challenges remain.
Important lessons to be learned about funding
Additionally, media leaders like TechCrunch remind all of us that, “good companies will always get funded.” I have found this very true; the best companies are truly standing out. The lesson here is that you need to focus on creating a viable business that has a solid framework, efficient and lean operations, and, most importantly, a solution for a target audience that will satisfy their needs. When I think of viable I think of cashflow and monthly recurring revenue.
This means looking at every aspect of your business to see if improvements can be made to remove repetitive processes and further automate the business to lower overhead costs. Not only will this make your business more attractive for potential funding because you have a better track record of cash flow, but you will also have a company that can operate through various economic cycles.
Also, remember that you don't have to raise funds simply because your competition is doing so. This strategy may not be the right one for your business plan and could do more harm than good. Instead, look thoughtfully and strategically at what you have and how you can stretch those assets, skills, and processes as far as they can possibly go before you reach for funding. Think of funding as a last attempt at growing your business. As the aforementioned Harvard Business Journal article noted, "we need to remember to hold out, to take the time to build the business into something actually worth VC funding. Then, when funding comes, you will be able to use the investment to scale quickly, not to figure out what you are trying to do." Taking this measured approach will enable you to make the most of the funding while ensuring you are building a sustainable business.
Lastly, don't focus on the news that the bubble may be about to burst in terms of funding and the recent economic growth that startups have injected into the national and global economies. We need to continue forging ahead, developing our businesses, creating jobs, and generating revenue.
John Rampton is an entrepreneur, investor, online marketing guru and startup enthusiast. He is founder of the payments company Due.