As the year continues to unfold, excitement continues to build around the "next big startup."
A startup by definition is a young company just beginning to develop a product or service with a scalable business model.
To really catapult a new company from the ground up, it demands a deep understanding on how to fund this new venture and what kinds industries are thriving within the world of startups.
Billions of dollars are invested in startups in the United States each year. The latest startup investment reported by Seekingalpha.com for the first quarter for 2016 was $14.6 billion, which was a 17 percent drop compared to $17.5 billion in the same quarter the year before.
So, how does one go about starting a new company and what industries are the most common? As you may have guessed, it depends on where you want to initiate your own entrepreneur project. The following infographic illustrates financing options and the types of new companies funded:
This detailed infographic is broken down into several categories. The top portion shows that self-funding accounts for 82 percent, with loans and lines of credit, split evenly at 41 percent. And the other common source of financing is friends or family (24 percent) and crowdfunding (three percent).
There are billions of dollars allocated toward startups, which come in all kinds of shapes and sizes. The following are the expenditures spent on startups by sector:
- Financial services - $765,910,100
- Retailing and Distribution - $693,413,400
- Semiconductors - $498,684,500
- Computers and Peripherals - $440,999,800
- Electronics and Instrumentation - $385,514,900
- Healthcare Services - $280,230,000
- Networking and Equipment - $232,005,900
- Telecommunication - $218,780,400
The range of these fairly young and innovative startups are sprouting up frequently. But it is important to understand how each of them went through a specific process and what obstacles they had to overcome to be successful as a profitable venture. In some cases, it’s worth examining the timeline of “How Startup Funding Works”:
In this instance, you can see a timeline and how a funding gets happens. In addition, this is a tentative framework from where a startup may begin with someone having a “big” idea to then becoming a co-founder and finally have an initial public offering (IPO) where anyone can have an equity stake in the product or service you offer.
We have all heard the stories about how Bill Gates, Steve Jobs, Mark Zuckerberg went on to become successful business moguls. All of them dropped out of college and when the tough got the best of them they kept going to see their project through to the end.
How to Understand the Venture Capital Process
The launch of a new business that features a new product or service takes lots of hard work, hours developing and testing the idea.
As an entrepreneur, you must come up with a good part of the money to invest in your big project idea. One option is equity financing which is essentially providing resources to these entrepreneurial companies to adequately support their size, stage of development and assets since traditional sources (public markets and banks) would be insufficient for them to survive on.
Angel investors, high-net-worth individuals, are entrepreneurs or executives seeking high returns through private investments for a startup company. The U.S. Small Business Administration lays out the typical process a startup or an innovative company must go through to be eligible for venture capital:
- Submit Business Plan
- Due Diligence
- Execution with VC Support
As the page explains thoroughly the venture fund looks carefully at the business proposal and if it meets the criteria. On phase two, there are prospects to make an investment and there is a greater investigation of the company (management team, market, products, services, operating history, etc.). Once you clear the due diligence step the fund makes an initial investment in exchange for some equity and/or debt.
In the final two stages the fund becomes actively involved and after four to six years it is expected to exit. This will usually happen when there is a startup that is acquired, merged or offers an IPO. On the other hand, the failure rate by startups can be best illustrated by Statisticbrain.com:
- Year one; 25 percent failed
- Year two; 36 percent failed
- Year three; 44 percent failed
- Year four; 50 percent failed
It’s worth mentioning this entire process of launching a startup comes with plenty of risks. Be mindful of what are the demands, responsibilities and expectations of the project.
Tips on How to Make Your Startup an Attractive Place to Work
In the environment of a startup there are restraints, but plenty of opportunities to create a unique company culture. Look at younger companies like Google, Facebook, Twitter, Apple and others. They all have a company philosophy and very dynamic atmosphere. Creatly points out a few tips to make your startup grow in 2016:
- Professional graphics designs add Value
- Avoid legal troubles
- Invest time finding mentors
- Manage carefully cash flow
- Dress code
You will have the leverage to attract and retain employees for your startup company if you offer
comprehensive healthcare insurance and a dental plan. While it may not necessarily be expected it is essential to do so when competing for the best talent. Designing a great logo with professional graphics designs is what helps brands connect with their targeted customer. Indeed, reaching out and networking with expert mentors helps cement the company´s credibility within an industry.
An energetic team with the capacity to provide world-class service sets you apart and offers a meaningful experience that customers get infatuated with. Consequently, having a relaxed dress code gives employees room to express their creativity and individuality by the likes of traditional dress code requirements.
Finally, in the early days of a startup be flexible and lenient with your day-to-day operations, but above all maintain professionalism at all times to land core partnerships.
Takeaways and Conclusions
Since the passing of the great recession plenty of innovation and startups are forming year after year. Thanks to the aid of venture capital, an improving economy or some angel investor entrepreneurs can tap into these financing options to better grow their company assets and staff.
With so much technology now available there are plenty of gaps to fill and niche markets to take advantage of. It will never cease to be an easy task when conceptualizing a new idea, but for those who put their best foot forward come away with success and a well deserved sense of accomplishment.