Funds Acquisition and Challenges to Startup
Funds Acquisition and Challenges to Startup
Executive Summary
“Money never starts an idea; it is the idea that starts the money”
– William J. Cameron.
Today, in the competitive world, entrepreneurs have a lot of sources to fund their ideas. We have conducted research to highlight startup challenges and problems with fund acquisition. It also includes a list of sources to raise funds and the advantages/disadvantages of startups. The study includes different startups which were successful in the last few years. And it also includes failed startups from the same industry. Further, the study performs a comparative analysis to identify the reasons for not getting funding or their failure.
Introduction
New businesses, commonly referred to as startups, strive to offer innovative solutions by introducing unique products or services to the market. Consequently, to fill gaps in existing products or create entirely new markets, startups often challenge traditional business methods and shake up entire industries. So, this innovative approach has earned them the reputation of being “disruptors” in their respective fields.
Start-Up Problems
Start-ups are the new companies in the market. Also, they tend to bring new ideas and concepts to solve the problems in the market. However, starting a new company or a start-up is difficult, and many fail during their first year of operations. For example, they face massive competition and challenges from the existing players in the market. As a result, they compete hard with start-ups and struggle to survive in the market.
How does a Start-Up work?
A startup operates similarly to any other business, where employees work together to create a product for customers. However, their product creation approach sets startups apart from traditional businesses. While traditional businesses often duplicate existing products or models, startups aim to develop something new and innovative.
For example, a startup may introduce meal kits like Blue Apron or Dinnerly in the food industry, offering a convenient and customizable alternative to traditional sit-down restaurants. This provides a unique value proposition and opens up a larger customer base of tens of millions compared to thousands for individual restaurants. So, by creating new categories of goods or services and disrupting traditional business methods, startups are often called “disruptors” in their respective industries.
How Do You Start a Startup Company?
Starting a startup company requires a great idea as a starting point, followed by market research to assess its feasibility and understand the current competition. After that, the next step is to create a business plan that outlines the company’s mission, objectives, structure, values, and goals.
Once the business plan is in place, the focus shifts to obtaining funding, which could come from various sources such as savings, loans, friends, family, or investors. Ensuring legal compliance and obtaining necessary licenses and permits is crucial before setting up the business location. Consequentyly, the final step is to develop an advertising strategy to attract customers, establish a customer base, and continuously adapt as the business grows and evolves.
How to get Funding for Start-Ups
The biggest concern of entrepreneurs is how to raise funding for startups. Startups generally raise money via several funding rounds:
- There’s a preliminary round known as bootstrapping, when the founders, friends, and family invest in the business.
- Afterward comes seed funding from so-called “angel investors,” high-net-worth individuals who invest in early-stage companies.
- When someone asks how to get venture capital funding for your startup? It’s essential to identify the willingness of that venture capital firm and whether they are interested and possess expertise in your business. So to answer the question of how startup funding works. There are a series of A, B, C, and D funding rounds that are primarily led by venture capital firms, which invest tens to hundreds of millions of dollars into companies.
- Once a startup has built a strong customer base and successfully grown its operations, it may opt to become a publicly traded company through various methods, such as an Initial Public Offering (IPO), a merger with a Special Purpose Acquisition Company (SPAC), or a direct listing on a stock exchange.
- This opens up the possibility for outside investors to purchase shares in the company, providing an opportunity for founders and early backers to realize a significant return on their investment.
In the early stages of startup funding, investment opportunities are usually restricted to high-net-worth individuals referred to as accredited investors. This is because the Securities and Exchange Commission (SEC) considers them to be better equipped to handle the potential risk involved with startup investments.
How Do You Get a Startup Business Loan?
For startup businesses, obtaining a loan can be done through various sources, including banks, specialized organizations, friends, and family. Meanwhile, the U.S. Small Business Administration offers micro-loans to small businesses as a great starting option. These loans are provided by nonprofit community lenders and are typically easier to obtain than regular loans from banks. But, on average, the SBA loans amount to $13,000, with a maximum loan amount of $50,000.
StartUp Challenges
Aggressive Competition
The business world can be extremely competitive. Startups often face significant challenges when competing against established corporations. This competition can be even more intense for online businesses.
So, the competitive environment keeps startups on their toes, as they can’t make any mistakes. B2B and B2C organizations always tend to feel the heat of heated competition. To get through this competitive business environment that covers both traditional and online businesses, startups need to tackle smartly and punch above their weight to gain much-needed recognition amongst the clusters of ever-challenging and expanding businesses.
Unrealistic Expectations
Success does not come alone. It brings expectations with it. Most of the time, these expectations seem realistic. But in the real sense of the word, they are merely unrealistic. Also, this same concept holds for young startups.
When a startup experiences success, it can be tempting to set high expectations for the future. However, it’s important to remember that success is often short-lived, and expectations can be endless. So, startups need to understand what is realistically achievable and strive for sustainability. But, this requires sustained efforts and an awareness of available resources, growth potential, and market conditions. In short, it’s a competitive landscape. Nevertheless, startups need to have ambitious goals that are tempered by a realistic understanding of the factors involved.
Hiring Suitable Candidates
Even so, one of the most critical factors that define organizational culture within a startup company is the team’s synergy. A team consists of individuals with similar capabilities and identical focus. Organizations – and startups in particular – need to hire suitable candidates to develop a highly successful team culture.
There is a vast pool of talented and hardworking individuals available. Particularly, a difficult task is to select a suitable candidate that fits the job well. It is one of the biggest challenges startups face in this digital age. When hiring a suitable candidate, organizations must remember one golden rule: Birds of a feather flock together.
Partnership Decision-Making
Partnerships are a critical factor in achieving success, including for startups. In today’s rapidly changing digital landscape, where organizations must compete fiercely to survive, startups face the challenge of finding dependable partners. This is especially true for tech startups, whose partnerships carry significant weight.
After all, entering into a partnership can bring substantial benefits to startups. Still, they must consider various factors before collaborating with another company in the same ecosystem. So, to bring in the maximum partnership benefits, startup businesses should look for organizations that enjoy an influence within the market and a good standing amongst the industry giants.
Financial Management
Money generates money. Remember that expenditure is most likely to increase when income increases. This concept is unquestionable. One of the most significant obstacles that startups face is financial management. Small startups heavily depend on financial support from investors, and when they receive a cash injection, they often struggle to manage their finances effectively. This can put pressure on the startup.
To tackle this challenge, startups must exercise caution and keep their options close. Seeking assistance from a well-respected financial consulting firm could help mitigate the financial challenges faced by startups today.
Failure to Plan
When the startup business idea clicks with the individual, they tend to implement the business plan into execution quickly. However, sometimes in the rush of launching a business venture, they fail to plan properly and cover every aspect of the business. As a result, the lack of planning leads to severe problems in the business, such as running out of cash, finding the right team, finding the right supplier, and many other related issues. Therefore, to avoid failure, one must prepare a detailed business plan covering all the areas like finance, sales, marketing, legal, etc. Moreover, this plan must be reviewed and updated frequently to prevent the business from failing.
Successful Start-Ups in the United States of America
Finance Sector
| Finance | |||
| Company | Year | Company Detail | |
| 1 | Brex | 2017 | Brex is a San Francisco-based financial technology company that provides business credit cards and Cash Management Accounts to tech companies. |
| 2 | Tax Bit | 2022 | TaxBit is an automated tax calculation and reporting software for cryptocurrency transactions. |
| 3 | Altruist Financial LLC | 2018 | Altruist Financial is a registered broker-dealer with the SEC and a member of FINRA. Also, they offer brokerage products and services. Additionally, Altruist is registered as an investment advisor and offers advisory services. |
Software Sector
| Business Product and Software Service | |||
| Company | Year | Company Detail | |
| 1 | Gong | 2015 | Gong is a revenue intelligence platform for B2B sales teams that enhances sales effectiveness by recording, transcribing, and analyzing sales conversations. It is the number one solution for sales teams. |
| 2 | Figma | 2016 | Figma is a web-based tool for interface design with offline capabilities through desktop applications for Mac and Windows. It offers a comprehensive set of tools for user interface and experience design, with a focus on real-time collaboration. |
| 3 | Turing | 2018 | It is a data-science-driven deep jobs platform helping companies spin up their engineering teams in the cloud at the push of a button. |
Health Care Sector
| Health Care | |||
| Company | Year | Company Detail | |
| 1 | Wheel Health | 2018 | The wheel is a healthcare technology company that combines the tech infrastructure and clinicians to power virtual care and telehealth. |
| 2 | Strive Health | 2018 | Strive Health is a provider of a care delivery model aimed at improving chronic kidney disease care. |
| 3 | Alto Pharmacy | 2015 | Alto Pharmacy was established in 2015 and offered a unique pharmacy model that places pharmacists at the forefront of a person’s healthcare journey. The company combines the expertise of pharmacists with custom-made technology to provide a more convenient and cost-effective medication experience. |
Technology Sector
| Technology | |||
| Company | Year | Company Detail | |
| 1 | Alkira | 2018 | Alkira provides end-to-end network segmentation solutions, allowing for the grouping of remote users, on-premise sites, cloud instances, network services, and SaaS/Internet exit points into designated network connectivity segments. |
| 2 | Starry | 2016 | Starry is a fixed wireless broadband Internet service provider (ISP or WISP) that uses millimeter-band LMDS connections, classified as 5G fixed wireless, to connect its base stations to customer buildings. |
| 3 | Dbt Labs | 2016 | Dbt (data build tool) makes data engineering activities accessible to people with data analyst skills to transform the data in the warehouse using simple select statements, effectively creating your entire transformation process with code. |
Details of Successful Start-Ups
| Company Name | Total Funding | Annual Revenue | Number of employees | % Change in Number of Employees |
| Financial Sector Companies | ||||
| Brex | $1.5 B | $248.5 M | 1337 | +67% |
| TaxBit | $236 M | $32.1 M | 230 | +283% |
| Altruist | $58.5 M | $68.7 M | 416 | +66% |
| Software Services Companies | ||||
| Gong | $583 M | $272 M | 1360 | + 86% |
| Figma | $333 M | $257 M | 1288 | + 95% |
| Turing | $155 M | $284 M | 1420 | +226% |
| HealthCare Sector Companies | ||||
| Wheel Health | $216 M | $58 M | 329 | +101% |
| Strive Health | $220 M | $66 M | 370 | +57% |
| Alto Pharmacy | $560 M | $197 M | 987 | +22% |
| Technology Sector Companies | ||||
| Alkira | $76 M | $17 M | 116 | +55% |
| Starry | $130 M | $112 M | 610 | +13% |
| Dbt Labs | $414 M | $57 M | 320 | +152% |
Unsuccessful Start-Ups in the USA
Finance Sector
37 Coins
37 Coins created a new platform for Bitcoin. In 2014, the company stated that transferring Bitcoin between different regions was unfeasible.
Details of the startup
- Founders: Johann Barbie, Jonathan Zobro, Songyi Lee
- Industry: Finances
- Started in 2014
- Closed in 2015
- Nº of employees: 1-10
- Funding Amount:< $1M
- Specific cause of failure: Lack of Funds
CircleBack Lending
CircleBack Lending was a platform that facilitated loan transactions. However, difficulties with profitability and industry challenges resulted in the startup having to shut down its operations.
Details of the startup
- Founders: Manoj Ramnani & Patrick Questembert
- Industry: Finances
- Started in 2012
- Closed in 2016
- Nº of employees:10-50
- Funding Amount: $10M-$50M
- Specific cause of failure: Faulty Business Model
Birdy
The Birdy was a straightforward application designed to monitor spending patterns. Despite its simplicity, Corey could not generate revenue from it, which led to difficulties with scaling.
Details of the startup:
- Founder: Corey Maass
- Industry: Finances
- Started in 2009
- Closed in 2015
- Funding Amount: $0
- Specific cause of failure: Lack of Funds
Software Sector
ANKI
Anki was a technology company founded in 2010 that focused on combining robotics and IoT (Internet of Things) in toys and games for children.
Details of the startup
- Founders: Boris Sofman, Hanns Tappeiner, Mark Palatucci
- Industry: Software & Hardware
- Started in 2010
- Closed in 2019
- Nº of employees: 100-250
- Funding Amount:> $50M
- The specific cause of failure: Lack of Funds
Rent Nest
Rent Nest was an app co-founded by Steven that allowed users to gather and share information about rental properties. Also, the company received funding from friends and was accepted into a startup accelerator. Over the course of two years, Rent Nest grew to bring in $12,000 per month in revenue. However, expenses totaled over $40,000 per month, leading to a shortage of funds and eventual shutdown.
Details of the startup
- Founder: Steven Glod
- Industry: Software & Hardware
- Started in 2012
- Closed in 2014
- Funding Amount:< $100K
- Specific cause of failure: Bad Business Model
DotCloud
DotCloud was a platform-as-a-service (PaaS) solution for developers that allowed them to host, build, and run their applications. However, the company could not maintain its operating costs and eventually shut down.
Details of the startup:
- Founders: Solomon Hykes
- Industry: Software & Hardware
- Started in 2008
- Closed in 2016
- Nº of employees: 250-500
- Funding Amount: $10M-$50M
- Specific cause of failure: Mismanagement of Funds
Health Care Sector
Call9
Call9 was a healthcare startup that aimed to provide patients with access to medical consultations over the phone. However, the founder’s inability to drive growth resulted in the company’s shutdown in 2019.
Details of the startup:
- Founders: Celina Tenev, Timothy Peck, XiaoSong Mu
- Industry: Health
- Started in 2015
- Closed in 2019
- Nº of employees: 100-250
- Funding Amount: $10M-$50M
- Specific cause of failure: Bad Business Model
Theranos
Theranos promised to use small blood samples to predict illnesses. Despite raising $1.4B, the company was revealed to be fraudulent through legal investigations, leading to its shutdown.
Details of the startup:
- Founders: Elizabeth Holmes
- Industry: Health
- Started in 2003
- Closed in 2018
- Nº of employees: 10-50
- Funding Amount:> $50M
- Specific cause of failure: Legal Challenges
Tandem
Tandem was a platform that offered live streaming of fitness sessions. The reason for its failure was the lack of engagement with live fitness, and influencers were hesitant to embrace a new platform.
Details of the startup:
- Founder: Nick Raushenbush
- Industry: Health
- Started in 2016
- Closed in 2016
- Funding Amount: $0
- The specific cause of failure: Bad Market Fit
Technology Sector
Legaats
Legaats was a web application that allowed baby boomers and senior citizens to share their valuable life experiences.
Details of the startup:
- Founder: Deepak Chhugani
- Industry: Technology
- Started in 2017
- Closed in 2017
- Funding Amount: $0
- The specific cause of failure: Bad Business Model
Phez
Phez was a Reddit-like platform built using Ruby on Rails by Shanti, a 38-year-old software developer and entrepreneur. The platform rewarded users with Bitcoin but failed due to its faulty business model. If Shanti had sold the Bitcoin used as a reward at the peak of Bitcoin’s value, he would have made $29,014.
Details of the startup
- Founder: Shanti Braford
- Industry: Technology
- Started in 2015
- Closed in 2016
- Funding Amount: $0
- The specific cause of failure: Bad Business Model
Ansaro
As a SaaS company co-founded by Sam, Ansaro aimed to revolutionize the recruiting industry through the use of technology, including AI. After raising $2.25 million from institutional investors and $750,000 from friends and family, the company grew its team to 6 members and earned a total of $100,000. However, with monthly expenses of $70,000 and a lack of product-market fit, Ansaro had to shut down after two years.
Details of the startup:
- Founder: Sam Stone
- Industry: Technology
- Started in 2016
- Closed in 2018
- Funding Amount: $1M-$5M
- The specific cause of failure: Bad Market Fit
Advantages and Disadvantages of Startups
Working for a startup has several advantages, including increased responsibility and learning opportunities. With a smaller workforce, employees at startups often take on multiple roles, leading to greater responsibility and a wider range of learning experiences.
The startup work environment is more relaxed, fostering a more collaborative atmosphere with flexible hours, more interaction among employees, and greater workplace benefits such as child care, free food, and shorter work weeks.
The startup culture also tends to be more rewarding, as innovation is encouraged, and talented employees are free to pursue their ideas with little supervision.
One of the main disadvantages of working at a startup is the increased risk, primarily in terms of the startup’s success and longevity. Before becoming profitable, new businesses must prove their worth and secure funding. Keeping investors informed of the startup’s progress is crucial, and there is always the possibility that the startup may shut down or lack the capital to continue operations.
Startups often require long hours as everyone works towards the same goal of success. This can lead to high-stress moments and compensation that doesn’t match the amount of time worked. Additionally, competition is high as many startups are working on similar ideas.
Analysis
The challenges faced by startups in the last few years have diversified reasons. Even though some startups were unable to raise funding and eventually shut down at the very start. These organizations mainly had a flawed business model or entered the wrong market. Once the feasibility of business in the market is determined, funding is the most crucial factor afterward in the success of startups. Funding was the second most reason for failure, even though the business model was perfect and was in synergy with the market. Getting investment in the growing economies is not a difficult path to tread, but it’s essential to identify the reluctance of investors.
Challenges in Fund Acquisition
Misidentified Cashflows
Startups usually cannot forecast their cashflows. The investors’ decision to invest is highly dependent on the true prediction of future cash flows. Sometimes, window dressing by startups is also the cause of investors’ reluctance.
Series of Executives
Investors’ does not prefer to invest when there are many executive positions in the startups. The conflict of interest rises and leads the businesses towards failure. The decision-making authority must be unanimous.
Implausible Business Model
Competitive Analysis, market saturation, investment goals, governance structure, financial management, and other factors must be considered while developing business models. Startups lack this expertise, which makes them vulnerable.
Misidentified Investor
In the process of fundraising, identifying the right investor is also essential. Every investor has expertise in different business areas. Startups must not expect to gain funds at every platform. They have to pitch their ideas in the right place.
Lack of Industry Knowledge
While great ideas are important, they do not guarantee success. Instead, the pitch to gain investment must depict a thorough understanding of the business. So, to impress investors, you must demonstrate your deep understanding and knowledge of the industry you pitch.
Industry-wise Analysis
Financial Sector
The financial services sector is accelerating its adoption of digital technology. Successful companies can maintain a diversified portfolio of active products. They are shifting towards digital assets because consumer demand is increasing in maintaining their digital investment portfolio, and they prefer digital transactions. Brex, Tax Bit, and Altruist’s financials show that these companies have had 13,7 and 3 rounds of funding up till now and were able to impress 53,29 and 7 investors, respectively.
These companies can maintain operating expenses as low as possible. Even the Tax Bit had laid off 15% of its employees at the end of 2022. However, Tax Bit and Altruit have shown a negative visitor growth rate in the last few months but were still able to raise funds. The failure of 37 Coins, CircleBack lending, and Birdy was a lack of funds and a lousy business model.
Software Sector
The earnings for companies in the Software industry have declined 4.9% per year over the last three years. Meanwhile, revenues for these companies have grown 11% per year. This means that although more sales are being generated, the cost of doing business or the level of retained earnings has increased, decreasing profits. The software sector is one of the most revenue-generating sectors considered in our study. Gong and Figma’s financials show that these companies have had 8 and 7 rounds of funding up till now and were able to impress 14 and 32 investors, respectively. Turing has only one investor, despite which company has recently generated the most revenue compared to other firms.
Health Care Sector
The earnings for companies in the Healthcare industry have grown 8.7% per year over the last three years. As a result, revenues for these companies have grown 2.4% per year. This means that these companies are generating more sales, and their profits are increasing too. Startups’ primary focus should be to reduce costs while improving health care services. The world population and the demand for healthcare firms is rising. The failure of considered firms was not due to the funding, it was due to the lousy business model and legal challenges. This means that the investors are ready to invest in healthcare industries but want a sustainable business plan.
Technology Sector
Alkira, Starry, and Dbt Labs show the least funding and revenue compared to other sectors. Still, the overall sector has grown 10% per year over the last three years, and the revenues for this sector have grown 11% per year. Technology is advancing rapidly; hence investors are keen to invest to gain higher returns in the short run. Legaats, Phez, and Ansaro, failed due to the poor business model and wrong targeted market. In the technology sector, the primary concern is for the employees; companies are becoming less dependent on human resources. On the other hand, companies can reduce their operating costs.
Conclusion
In conclusion, the study suggests that the availability of funding varies by sector. In some industries, it’s a primary factor of failure or success, whereas, in others, funds availability is not the concern. However, he sector considered in our research illustrates that the Financial sector demands the highest acquisition of funding. Due to the higher risk factors involved in this sector, pitching to the right investor is essential. While acquiring funds in the Software, Healthcare, and Technology sectors is not tricky, their failure is more inclined toward organizational issues, market segmentation, and poor financial management.
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