Marathon Investments vs. Sprint Funding - 5 Lessons On Startup Capital

Every scalable startup will require external funding. A great team with an amazing idea where there is a clear demand is still doomed without the finances to make it happen.

In fact, a truly great team will integrate future capital needs into their strategy from the very beginning. The question isn’t whether or not you need startup capital; it is whether you get today’s funding with the future in mind (Marathon Investments) or simply meet the needs of the moment by whatever means possible (Sprint Funding).

Most startup funding efforts follow a Funding Lifecycle involving some combination of family and friends, grants, banks, crowdfunding, Angel investors, and Venture Capital firms at different stages of growth and expansion. Progressing through the funding stages from Concept to Mezzanine is a marathon; however, many otherwise high-potential start-ups never make it due to poorly designed deals in the first stages of funding. Agreeing to the wrong terms on Seed Stage and Early Stage investments have the potential to kill future rounds of investment.

Marathon Investments

Ideally, this is the mentality all entrepreneurs should have towards startup funding. This means practicing a great deal of willpower, careful planning & strategy, and understanding what is and will be the true value of your company. Calculating the valuation of your business can be a difficult, but critical task for future planning. Often times, entrepreneurs will jump the gun and accept investment offers from anyone in exchange for stakes in the company. By doing so, the founders are creating a more difficult situation later on. Founders should maintain a majority ownership of the company, as they are the ultimate decision makers. Holding on to as much equity as possible throughout the beginning stages of your venture will provide better leverage in later investment rounds with VCs or CVCs. A good rule of thumb is for the team to hold onto 25% of their company through the exit.

You’re probably wondering how to bootstrap your company all the way through to the Mezzanine level? This requires a significant amount of sweat equity, research, and many applications. Here are the most common options:

Cashing out 401Ks or stocks to fund their company (this is a personal risk, but many entrepreneurs take this route).
Government or private grants will provide funding without losing any equity.
Startup competitions provide cash prizes and networking opportunities (and even free spots in accelerator programs).
As of recently, crowdfunding campaigns have boomed for startups. They have allowed them to connect to their customer base and receive funding for the future product in exchange for special incentives.

Sprint Funding

In a perfect world, everyone would operate on the marathon investment mentality. You will accomplish your goals and achieve success! Realistically, many function on sprint funding (and often to not survive long enough to consider marathon investments). Sprint funding is not a bad thing by nature, but it can create detrimental problems if you depend on it. Here are the top 3 mistakes entrepreneurs make early on:

Funding debt. Finding investments to pay off debts for product development, operations, or to pay your employees is prolonging critical problem in the company.
Not operating on a lean model. There is a reason why minimum viable products (MVPs) exist. You are able to have a product that generates revenue and can be modified later on. Consistently seeking more funding to create a perfect product without generating revenue is just digging a deeper grave. Essentials come first, extras are for later.
Giving up too much too fast. As stated earlier, founders should want to maintain majority of the company. Hold out for better deals, and give you and your company the worth and respect it deserves.

Dianna Labrien, offers the following 5 tips to make the most out of your early financing deals:

Don’t give up pro-rata rights to your first investors.
Restrict your share restrictions.
Avoid having too many people overly involved.
Avoid limits placed on management compensation.
Find investors who “get it”.

Viewing your startup capital needs through the lens of your future situation may slow things up a bit today, but will make fulfilling the vision much easier in the long-run.

Entrepreneur Types Explained

Growing Your Company: How Deep Should Your Bench Be?

Matthew Cleek

Matthew Cleek is a serial entrepreneur and is a co-founder of FundingSage, which provides valuable information, tools and resources to entrepreneurs seeking to start, grow and fund a business. Matthew's business ventures include Intellithought, theEclassifieds, Spectrum20, Theme Spectrum and more.

Definitioner

Sprint

In the tech and startup communities, a sprint is a process in which entire teams pitch in and work together to complete a defined objective in a short period of time.⁶

Majority

The percentage defining the level of shareholders that must approve significant company actions such as borrowing money, or acquiring or merging with another business; typically defined to be 50.1% or greater.⁶

Mezzanine Level

Mezzanine level is a term used to describe a company which is somewhere between startup and IPO. Venture capital committed at mezzanine level usually has less risk but less potential appreciation than at the startup level, and more risk but more potential appreciation than in an IPO.⁹

Funding

This term is used synonymously with the words “financing” and “capital.” It refers to the amount of money that is needed for a business endeavor. For example, a new business owner may seek a certain amount of funding for their startup company. This “raised” capital can be used to launch their endeavor as well as to sustain their company until monetary profit can be generated.⁴

Venture

Venture is often used for referring to a risky start-up or enterprise company.⁵

Startup

A startup is a new business venture / enterprise in its initial or early stages of development. These stages include the concept, seed, early, growth and mezzanine stages.⁶

Exit

Exit is the sale or exchange of a significant amount of company ownership for cash, debt, or equity of another company.⁵

Equity

Ownership in the capital of a Company. In corporations, it is called “stock”; in limited partnerships or LLCs, it is called “interests” or “units.”³
This designation is given to a stockholder’s ownership in a company. The amount of ownership is obtained when an individual or corporation purchases one or more shares of stock (equity shares). The more equity purchased, the greater the ownership.⁴

Risk

The probability that part or all of an original investment will be lost or that investment returns will be lower than anticipated. Numerous factors may impact these potential investment and return losses, including but not limited to demand risk, economic risk, environmental risk, funding risk, legislative risk, maintenance risk, operational risk, procurement risk, technology risk and timing risk.⁶

Debt

Any obligation by one person to pay another. May be a primary (direct) obligation as in a Note, or a secondary (contingent) obligation as in a guaranty.³
This is an amount of money that a borrower owes to an individual, investor, or lending institution. In the finance world, the word “debt” is often associated with interest payments. For example, when an individual has a credit card limit of $5,000, the lender, usually a bank, is willing to lend the credit card holder $5,000 of credit. If the lender uses $500 of that total amount, they are now considered to be in $500 debt until the total amount is paid. Partial payment of an owed amount always encompasses interest.⁴

Capital

Financial capital is a term that can refer to the money exchanged between entrepreneurs and investors during a business deal. Entrepreneurs need to raise capital for their startups while investors can provide them with the needed capital (or funding). Financial capital usually comes with interest, and new business owners can use their financial capital in purchasing real capital (or machinery or equipment) for their new business.⁴

Accelerator

In an Accelerator, a Seed investment is made in return for equity and usually between $15K - $50K. Startups are admitted in classes and work in groups. They are generally given a deadline to complete intensive training and iteration (typically 1 week to 6 months). Startups end an accelerator program with a Demo Day in which they pitch to investors.²

INFOGRAPHICS

INFOGRAPHICS

Marathon Investments

Sprint Funding

Dianna Labrien, offers the following 5 tips to make the most out of your early financing deals:

Matthew Cleek

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