Seed money. Bootstrapping. Crowdfunding. Angel investors. Peer-to-peer lending. Venture capital. A rose by any other name.
Business development consultants echo the ultimate startup bottom line: the most common challenge is coming up with the necessary seed capital.
- Bootstrapping is a popular – and private – type of startup funding and typically includes personal savings accounts, credit cards and home equity lines of credit.
- Local, provincial or federal small business development centres help connect entrepreneurs for networking and angel investors for funding, as well as alternative funding sources like micro-loan organization and crowdfunding websites.
- Eventually startups usually involve outside investors: angel investors – usually established business people with high net worths who are looking to invest anywhere from $10,000 to a few million dollars.
- Funding at least $1 million or more is the world of venture capitalists (VCs), which requires in-depth and airtight business plans.
Whether it’s an innovative new online parking app, a craft brewery, a mobile dog-grooming service, baby accessories that will revolutionize parenting, a remote connection for oil drill sites or a hot-concept café, most businesses and most entrepreneurs need a little or a lot of funding to launch, especially in the early days.
“A lot of startups never get off the ground because they haven’t satisfied the most basic requirement of offering a product or service that a specific customer segment desperately needs,” emphasizes Ray DePaul, director of the Institute for Innovation and Entrepreneurship at Mount Royal University.
“A lot of entrepreneurs fall in love with their idea and don’t go through the critical process of determining what burning problem they are solving and for whom. Those who get past this hurdle and end up running a small business are faced with a different set of challenges.
“While we need to create many more startups in Alberta, we also need to ensure the high-potential ones actually grow.”
The reality of the real business world sets in early, according to Kari Gordon, executive director of Startup Calgary, the committed and passionate not-for-profit that connects new entrepreneurs with people who can help take their ideas from wishful thinking to making-it-happen. “One of the primary keys to startup momentum is being realistic, understanding the customer and knowing what problem you’re solving. It defines the market.”
“Investors are looking for three things before they invest in a startup,” DePaul explains. “Does the startup have a strong value proposition that solves a big problem? Do a lot of customers have this problem? Can the team actually pull this off?
“While the relative importance of these questions varies for each investor, it’s commonly understood that without the right team, nothing else matters. Given that it’s likely the startup will have to change directions at least once before they find success, investors like teams that have the capability to make these pivots before they run out of money.”
All three levels of government have various groups and agencies to encourage entrepreneurs and small business hopefuls.
“While launching a startup is not for the faint of heart, it is rewarding and exciting,” Gordon adds, referring to the many Startup Calgary activities, forums and valuable opportunities for entrepreneurs to network and get involved. “To gain momentum and achieve growth and success, the entrepreneur must be involved in the local startup community, understand who the players are and develop relationships and access with like-minded people who need to know who you are, about your business, your value proposition, and what is compelling about your story.”
There’s a consensus that startup funding is available, but not easy to acquire. “It’s always tough to get funding, but the proliferation of startups actually increases the available funding,” DePaul points out. “Those who invest in startups often invest in dozens of companies. This level of diversification is critical in the higher-risk world of early-stage investing.
“Managing cash flow for a cash-strapped startup is always hard. If you are selling physical products, you often have to buy inventory months ahead of when you will see the revenue. This is a good place to access credit to bridge these gaps. Some entrepreneurs are loath to take on debt. They are often underpaying themselves and the thought of adding debt to their burden can cause a lot of stress. They have to view debt as a vehicle to fund growth.”
Many business stats confirm that funding can be a startup dealmaker or a deal-breaker.
A recent survey showed that poor cash flow is the main reason why 90 per cent of small businesses fail.
“Too often they get excited after the launch or after the first customers and they tend to spend money on things like a marketing budget without paying attention to the KPIs (key performance indicators) – the measurable values that demonstrate how effectively a company is achieving key business objectives. They lose sight of the customer,” Gordon adds.
Recent years have been a boon time for Calgary startups. Ironically, the downturn and the Calgary employment situation have proven to spike interest in startups, partially due to displaced workers opting to start their own businesses.
“While there is funding capital available in the Calgary market,” she says, “it’s tough work. Calgary requires hustle and grittiness. It’s not like strolling into the Dragons’ Den. You have to be willing to hustle, connect with people and the community.
“But we get a lot of people at Startup Calgary, coming from 10 or more years of the corporate environment, where other people were driving the bus. We coach them, we mentor them and get them ready to transition and drive their own bus.”
DePaul says people are drawn into the startup world during tough economic times.
“When times are booming, people are starting companies to be opportunistic. When times are tough, people start companies to control their own destiny. I actually think it’s a pretty resilient ecosystem.”
With Calgary-area business savvy and enthusiasm, he mentions the city’s solid business base and growing diversity. “Calgary has a lot of experience in the energy sector, so those who made their money in oil and gas are most comfortable investing in what they know. We also have a growing technology sector and over the last few years, more funding is becoming available.
“We have very strong grant programs from Alberta Innovates and the federal IRAP (Industrial Research Assistance Program), a growing core of angel investors, VC funds like the Accelerate Fund, Yaletown Venture and iNovia Capital, and a new Alberta Investor Tax Credit (AITC) to entice investors to support local startups. We are on the right trajectory.”
There’s no denying the uncertainty of the Calgary economy can make it a bit of a bumpy ride for startups.
“Let’s be honest,” he adds with positivity. “It’s a bumpy ride for startups wherever they happen to be located. Good entrepreneurs are exceptional at creating value for their customers. If they can do that, they will be successful. If they find it challenging to sell to local customers, they will target organizations outside of Calgary and Alberta. They will go where the customers are.
“Remember, great companies like Microsoft and GE were founded during a recession. There is an abundance of talent available and an incentive to go out on your own. Some would argue that it’s never been a better time to create a startup.”