My Reflection on Startup Financing

Recap: CS3216

This semester, I am enrolled in CS3216 - Software Product Engineering for Digital Markets. Each week, we have different presenters come talk to us about different topics that might help us in developing innovative products that will gain traction in the market. This week we have an speaker experienced in startup financing coem talk to us. I’d like to share my reflection about the discussion, for the future self and also for anyone that might want to hear more about what I’ve to say.

1. Startup financing is about high risk, high rewards

Given that 70-90% of startups fail, from an investor’s perspective, he needs to consider whether a startup can eventually scale up to 10x rewards. The VC model is hence, not to hope that all startups they invest in will succeed but just that 1 company to grow big (to sell company/sell the shares off - since it is very rarely/takes too long for the startup to grow big).

2. Too much money can be bad?

Before this lesson, I didn’t think that raising too much money can be something bad. I would liken this to the Resource Curse (e.g. countries with too much oil tend to not diversify their markets and thus, suffer economically when the oil supply runs out). With more money, there could be too much dilution and founders earn less (thus, might also affect their motivation in building the company instead of just giving themselves high salaries). If a company has too high a valuation too early, they might also be “stuck” as they can’t prove that they are indeed worth that much before the next round of investment. Thus, I believe as a startup, we should plan what finances we need and not over-sell (fake it till you make it mentality) for the sake of doing so.

3. Convertible debts, debts and equity - whats the difference

Before today’s lesson, I never knew about convertible debts and was intrigued by how it works. As a startup is high risk, it is unlikely to receive a loan especially at the early stages. The most common way that a startup raise funds is by selling equity - however, at the early stages it is also very hard to estimate the value of the company even after hiring experts and lawyers to negotiate. Thus, what some investors do is they lend startups money (its much faster to just lend!) in exchange for a cheaper deal (or a cap on the company’s valuation) on a fixed period in the future. This way, they don’t have to waste time and money to estimate the valuation of the company when things are still pretty uncertain in the early stages.

Written by Melodies Sim who lives and works in the Bay Area, California turning novel ideas into reality. Check out her projects on Github.