Many aspiring entrepreneurs often give up on their dreams all because they don’t have the capital to start their businesses. As entrepreneur Mark Cuban said, “Only morons stat a business on a loan.” When sharks like Cuban say it, it’s enough to convince many to just defer starting their ventures.
The reality can be cruel for entrepreneurs in emerging economies like in Southeast Asia. The transition from a largely agricultural region towards being a global tech hub pose key challenges for tech ventures to bootstrap themselves to profitability. Having personal wealth can be dependent on lucking out on the birthright lottery. It does take money to make money.
Also Read: Startup funding in 2017: A different game?
A number of millennial entrepreneurs only dare to fund their tech ventures through lower-risk funding sources such financing from family and friends. So, what’s a person with dreams but not much capital got to do?
Costs and cash flow
Tech in the region is being driven by a young and capable generation of technopreneurs. But getting into the tech game can be expensive – equipment, software, hardware, and even internet connectivity all come with a price. Prohibitive regulation and bureaucracy can also stymie many efforts where the process of incorporation alone can set a business back in time and costs. Local ventures also face tough competition in hiring capable workers against offshore firms who can offer better compensation.
In tech, speed is key. One can’t rest on a good idea alone. Exciting as an idea is, there are plenty of other startups around the world who might be trying to do the same. Beating people to the punch is absolutely necessary. Getting an idea to a product that ships takes a considerable amount of funding to accomplish.
Some entrepreneurs strive to secure bread-and-butter projects or an initial client in order to generate some cash inflow and keep the monthly numbers in the black. However, these projects can distract ventures from working on their main idea.
Access to funds
Venture capital and angel investors are quite keen on investing in the SEA tech scene. They do bring in the big bucks, oftentimes, accompanied by mentoring, but the trade-off is that they will take equity. Some may even insist on participating more closely in the business so you may be ceding full control over your venture even with your day-to-day operations. There’s also the immense pressure for quick turnarounds these entities can impose upon your business.
Crowdfunding has also become quite the fad but the scene has become too noisy that it’s hard even for a legitimate idea to come across as such and not be viewed as some pet-project that needs some spare change to finish.
Then, there are the more traditional sources of funds like loans from banks and lenders. However, loan products can be improved where lenders should be more flexible in the rates and the collateral they seek. In the US, many entrepreneurs are empowered to embark on actually building a good product due to easier access to loans. Private online lenders are seen as good alternatives for small businesses. Even fintech players have gotten into loans with services like Fundera that provide borrowers access to multiple loan products under one service.
When loans might just be a better idea than VC funding
Unless it comes from your own funds, external funding can be viewed in terms of equity (investors) vs. debt (loans) – either you trade off part of your business for some financial boost or commit yourself to pay off a loan with interest. Both sound daunting, though most would rather get in bed with an investor than secure a loan.
VC money is quite the rage in the region these days. Major funds like Coatue Management, Sequioa Capital, and B Capital Group have all made waves pouring money into ventures like Grab, GoJek, and Tokopedia. China is also getting in the game with Alibaba buying out SEA e-commerce venture Lazada.
For small startups, here’s one way to view it. For example, you need US$100,000 to fund your idea. A VC wants in but for 30% of your business. A loan is available at 8% interest. If your business becomes a $1,000,000 business in a year’s time, you either end up owning a $700,000 business partnering with a VC. Or, you end up with a US$892,000 business after paying off the loan.
There are definitely pros and cons in each arrangement. On one hand, it is tough for startups and young entrepreneurs to secure more sizable loans compared to what VCs can give. Loans can also be pretty devastating if you don’t know how to manage cash. Securing that loan upfront means having to pay US$9,000 a month. The pressure for profitability need not come from a board member, but from the repo man waiting to throw you out of your home. A borrower risks the entire business, the collateral, and his personal financial well-being if things don’t work out.
On the other hand, with loans, you would not have to hand over part of your business and control over to someone else if you succeed. If your venture doesn’t require committing yourself to pure R&D to get started but can generate income through services or an initial client, then loans can actually be manageable. Your inflow can offset the cost of the loan. You can also have a choice in the length and terms of the loan.
Short-term loans can also come in handy to give your business a much needed jolt especially when your business some immediate inflow to pursue opportunities.
The takeaway: Money smarts needed
In my years working with startups, I have seen many ventures collapse all because they don’t really have a complete business plan to back the idea up. Financials often take a backseat over how cool and novel an idea is.
I encountered this mobile game development project backed by an angel investor. The project took more than a year of manpower and resources to bring to a shippable state. However, the game was not designed to be monetised according to any proven business model. It ended up sold to a publisher at just 15 percent of the development cost. This serves as a sad case where “Build it, and they will come” is hogwash. You can’t just be playing with someone else’s money without taking into consideration how well it is spent and how you can actually earn it back.
It takes a lot of guts to start a business. Aside from guts, it is essential to have a great product idea that people actually need. Funding sources are available but you must genuinely understand that nothing comes for free. Venture capital may get all the hype these days but loans may not be as bad as some portray it to be. But no matter where the money comes from, money smarts is definitely a requirement for success.
The views expressed here are of the author’s, and e27 may not necessarily subscribe to them. e27 invites members from Asia’s tech industry and startup community to share their honest opinions and expert knowledge with our readers. If you are interested in sharing your point of view, submit your post here.
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