Starting a business is an expensive process. For example, setting up the processes needed to provide products and services to interested individuals means paying for machines, paying for supplies to be fed into those machines, paying for the people to feed those supplies into those machines, paying for the physical space needed to house them, as well as a host of other expenses in both the short run and the long run. Never mind the costs needed to monitor costs, manage resources, market to potential customers, and all of the other processes without which a business cannot succeed.
As a result, most entrepreneurs will fund part of their start-ups using their own resources while using the funds of other people for the rest, thus enabling them to start their businesses at a time of their choosing instead of being forced to wait until they have managed to save up sufficient funding, which can have a critical impact on their chances of success. Sometimes, this funding will come from lenders, meaning that the entrepreneurs will have to pay interest but retain the most control over their own operations. Other times, this funding will come from start-up investors, which can provide a wide range of useful resources but will expect a corresponding share of influence as well. Both options have their fair share of pros and cons, but in the end, both options come with serious consequences for the failure to make use of them with the appropriate level of care and caution. Something that some entrepreneurs have learned to their regret in 2016.
The Prospects for Startup Funding in 2015 and 2016
Start-ups often need more than one round of funding. Sometimes, this is because their operations have become successful enough that more funding is needed to fuel their expansion, thus enabling them to maintain the explosive rate of growth that is often a start-up’s most attractive feature. Other times, this is because their estimates of their resource needs were too low but their prospects remain positive, meaning that more funding is needed for them to realize their full potential. Often, start-ups can even seek further rounds of funding for a mix of these two as well as other potential reasons, which should come as no surprise because such businesses come in such a wide range of sizes, shapes, and sectors that result in a wide range of funding needs.
However, when start-ups seek further rounds of funding based on their previous experiences, the results can be surprising because start-up investors are changing their expectations on a constant basis for the simple reason that economic conditions are changing on a constant basis. For example, start-up investors tend to be more willing to invest in economic boom-times because more opportunities mean better chances of success and thus better chances of respectable returns for their investments. Likewise, when economic prospects are uncertain, start-up investors will become more cautious with their investments, meaning that even when they choose to invest, they will ask for additional conditions in an attempt to protect their wealth.
Something similar happened between 2015 and 2016. In brief, 2015 saw start-up investors at the recent peak of their willingness to invest, as shown by how more than 1,500 start-ups managed to raise their first rounds of funding in the first quarter. However, since that time, start-up investors’ expectations have changed, meaning that start-ups had to meet higher standards when it came to their customers as well as their revenues in order to secure funding from them in 2016. For entrepreneurs who chose to start their businesses in 2016, this was not an issue because they were expecting such conditions at the time of their choice, but for entrepreneurs who had started their businesses in 2015, their search for further rounds of funding were often met with refusal because of their false expectations based on their previous expectations. As a result, a lot of start-ups have been forced to cease their operations in 2016, enough so for there to have been a noticeable trend in spite of the fact that start-ups have high failure rates even under optimal conditions.
With that said, it is interesting to note that while start-up investors have been investing less in start-ups, as shown by the fact that $61.2 billion were invested into start-ups in the first three quarters of 2015 compared to $55.5 billion in the same time period in 2016, there has been a significant change in their investment patterns as well. In 2016, more and more start-ups investors are concentrating their investments in fewer and fewer start-ups right from the start instead of providing multiple rounds of funding, which explains why entrepreneurs who started their businesses in 2015 struggled so much. For that matter, it is important to note that this change has encouraged ferocious competition between start-ups for fewer opportunities, thus contributing to the outcome as well.
People who are interested in business should see this as a reminder that business conditions can change with surprising speed, which in turn, can mean serious consequences for businesses that have become too accustomed to the previous state of things. As a result, business people should keep a watchful eye on business conditions at all times, which will not just save them from being caught by surprise but also enable them to act on potential opportunities in an effective and efficient manner. Doing so is particularly important for startups, which can be compared to small boats sailing in rough weather, meaning that a sudden change could spell their doom by dragging them down to the bottom of the sea.
Regardless, the change in funding requirements in 2016 was a serious problem for startups that were expecting something similar to the funding requirements in 2015, but not so much for the rest of their counterparts. It is unfortunate that some startups have suffered significant losses because of their false expectations, but in the end, this is no more than part of the normal state of things. After all, while entrepreneurship can be one of the most rewarding experiences out there, it is not known as a high-risk, high-reward choice without reason.