— August 1, 2019
One of the biggest problems faced by businesses today is maintaining liquidity or access to public funding. This is most true for startups, which often take funding from wherever they can get it in order to bring their business plans to life.
Small business loans and private equity or venture capital firms tend to be popular sources, but while VC investments are on the rise, they’re mostly directed at later-stage companies, leaving startups and early stage companies insufficiently funded.
To that end, distributed investment models are increasingly becoming a funding solution for early stage companies — with the likes of crowdfunding platforms, initial coin offerings, and public exchanges that list growth-stage companies.
For companies that are ultimately trying to deliver products and services to the public, this allows that same public to invest in their growth and development. It also gives them access to supportive investors and rapid funding that create a solid foundation for the growth of their business.
The Hurdles in Early Stage Funding
In an ideal world, viable businesses would have access to the funding they needed as soon as they started developing their ideas. Unfortunately, that’s not always the case. In fact, in the current landscape, there’s actually a growing void of startup funding that makes it difficult for new businesses to launch.
According to a joint research report by PitchBook and the National Venture Capital Association, early stage capital investments dropped by $ 2 billion in the fourth quarter of 2018, compared to the previous two quarters.
While the promise of large amounts of funding can be enticing, relying heavily on VCs can prove problematic for companies that are just starting out. The world of VC is guided by the actions of its most prolific firms.
Attracting their investment attention could lead to added hype and additional funding from other sources seeking to participate in the next Uber, but once you have closed a VC round, you are wed to that investor.
And if one of your lead investors decides not to participate in a round of funding, it might prompt other potential investors to get spooked and do the same. Your company then loses out on both funding and interest, which are among the top reasons startups fail.
Funding can come with caveats.
Under the traditional VC model, funding itself can come with caveats. This type of private investment tends to have a predefined duration, as VC firms have an obligation to return capital (and profit) to their own investors within a specific time frame.
This can create a situation where the pressure is on companies to grow as quickly as possible in a short time frame — sometimes at the expense of the long-term viability of the business.
VCs will also typically aim to exit through mergers and acquisitions so that they can control the exit path and guarantee their shares are sold at a certain valuation, potentially putting them at odds with management’s objectives for long-term growth.
On the other hand, by choosing to access investment from a broader investor base, companies can clear some of these funding hurdles while positioning themselves for long-term success.
Taking the Path Less Traveled for Public Funding
Public companies are built to last. Rather than focusing on an immediate payout, they stand the test of time due to a laser focus on generating sustainable revenue and long-term profits. By being public, companies can communicate openly about their progress in order to increase their profile and capitalize on the ensuing investor interest.
By targeting public VC as a funding model, you have the opportunity to democratize investment and protect your company in the process.
Instead of relying on just one big investor, you can access hundreds of smaller investors through prospectus offerings or private placements. And that means that if one investor chooses to pull his or her investment, you can easily engage others in the next round of funding without compromising your company’s success.
By having access to the platform of a stock exchange, you have access to an easy rotation of shareholders. Through a more diversified approach to funding, you can remain agile and focus on effectively building your business.
How to Start Incubating on a Public Market
Before listing on a public exchange, you should be confident in your company’s direction, understand key performance indicators, and have meaningful news flow for investors to evaluate the progress of the business.
Being prepared will make it easier to leverage the incubating features of the public market, such as easy access to supportive investors who can help you raise funds quickly so that you can continue to develop your business.
Once listed, there are three things you can do to take advantage of this environment and harness success.
Engage your pool of investors early on — and on a consistent basis — and share how your organization tracks against KPIs. In doing so, you will develop a strong foundation of supporters who have bought in (both literally and figuratively) to seeing your business succeed. Foster those relationships by focusing on the people who are aligned with your long-term vision and want to see you reach your goals.
2. Listen to the market.
The public market can provide you with insightful feedback on whether your business strategy resonates with investors. If your stock is under pressure, actively seek insight on why that’s the case and be proactive in your communications if it’s based on a misconception. Be ready to take constructive feedback from your investors and pivot if it makes sense.
3. Move fast.
Above all else, be opportunistic. Leverage the ability to finance quickly in the public setting, as this will set you apart from your competitors. If your business strategy includes expanding through mergers and acquisitions, use your publicly quoted share currency to move faster than other companies in your industry.
With these pieces in place, you are more likely to capitalize on the public venture landscape and meet your business goals. Opting for this democratized approach to funding could help reduce financial risk. It could also give you faster access to funding, and form a direct connection to individual investors looking for a secure return on their investment. For companies looking to disrupt the traditional VC funding model, the public route might offer a compelling alternative.