Every year, there will be new start-up companies being formed in Singapore. According to data from Singstat, the number of businesses incorporated locally from 2014 to 2016 is 77,379, 64,906 and 64,939 respectively.
As with any normal business ecosystem in a mature economy, a large number of these new start-ups will fail within the first few years of incorporation.
When asked about the reasons for failure, most entrepreneurs will lament that lack of funding and start up loans resulted in their business failure.
The credit criteria to qualify for a business loan in Singapore is stringent will also be another common reason often cited.
However, if there is money readily available for all start-ups, will the company not really fail?
When seeking financing, an entrepreneur should ask himself/herself a question.
Is the financing for a tactical purpose or strategic purpose?
If you’ve not been keeping a close eye on your working capital running into a cash flow crunch and have to scramble for a loan to tie up loose ends, this is for a tactical purpose.
If you’re anticipating a large project to be awarded to you and start planning months ahead by priming your cash flow and financial reports to be in the best financial shape when applying for loans, this is a strategic purpose.
When seeking external shareholder or equity funding, the type of investors you’re reaching out to also reflect your financing purpose.
If only the price of funding is considered, the financing purpose is only tactical.
If you consider intangible benefits the investor can bring to the table including industry expertise, network and prior experience, this is strategic financing.
How should you conduct strategic financing?
First consider your company’s current position in term of risk compensation factor. Put yourself in the financier’s shoes, be it the banker assessing the application or a venture capitalist you’re pitching to.
Anticipate the financier’s concerns and address them before you put in your application or present your pitch.
Instead of a show and tell on how magnificent your product and service is and how you’re going to dominate your market with more funding, focus on sharing the viability of your business.
Crunch through the numbers and make realistic financial projections, including the strategic direction you intend to bring your business to. Explain clearly how and why you’re going to utilize the funding for.
This will tell your financier that you’ve done your homework and have a concrete plan to execute once you’re supplied with the ammunition you require. Getting the groundwork done by establishing trust with bankers and investors is important aspect of any fund raising work.
Secondly, consider the time element and concept.
You have to clarify the company’s business models and determine the short to mid-term business goals you can reasonably accomplish within a proposed time frame.
Timing the market is a delicate balance act of science and luck rolled into one. If you manage to ride the initial wave of a big market shift, your time frame will be much shortened.
If your solution is too far forward for a problem that does not exist yet, it might never gain traction.
Thirdly, consider how the demand and supply of money affects your company’s valuation.
What an entrepreneur think is the fair value of his company might not be recognized by the market of funders.
Valuations might not always be rational and capital has its own logic. Every time you seek financing, think about the value of your business
You can use the market’s irrationality to secure more cash but when the market turns, do not turn to the market anymore.
Following the 2008 financial crisis, money was in large supply as central governments globally started pumping up the supply of money to save the global economy.
In this period of exuberance, valuations of assets and companies were no longer fundamental in nature.
This is a good time to seek funding as investors have too much money sloshing around and banks have to lower interest rates to push out the excess credit.
Fourthly, understand what funders want
Banks want their loan to be repaid on time with applicable interest and investors want a large upside and ROI from their investments.
Aside from the basic purpose what funders want, there are also other considerations.
Entrepreneurship capability, maturity of the keyman in the business and supporting team behind the company are also things that funders want to see.
Core competencies such as technical hard skills and other soft skills such as management and strategic thinking are highly prized by funders.
Experienced entrepreneurs only need to spend five to ten minutes to be able to present the company’s business visibility analysis clearly to investors.
Entrepreneurs must have a big enough vision because investors are greedy and want superb returns in exchange for the risk and capital they undertake.
Lastly, seek external advice and opinion.
Before financing, you can find representative investors, talk to them first, and ask them to analyse your business.
Get a feel of other investors’ initial valuation of your business. Valuation is extremely subjective, reflecting future expectations of returns.
Investors will assess whether the business owner can grasp the company at different stages, whether the risk is predictable, how to manage risk and so on.
Business failure often occurs from the founder’s bad judgment. Because of one or two critical wrong decisions, coupled with bad timing and external market fluctuations in combination, will usually cause the collapse of the company.
Some companies are in a very good shape, not because the founder consistently made good judgment and decisions, but purely because of favorable market conditions.
Regardless whether if the lack of funding is the main reason resulting in business failures, all entrepreneurs should seek to take a strategic view when seeking financing.