Every start-up needs money. But finding the right source of money is the real key to making it. The most important aspect of a start-up is its ability to create a business plan that is sustainable in the long term given the sophistication and availability of financing in the market where it is operating.
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If we operate in a market whereFinancing rates are high, then these funding costs need to be included in the company’s cost structure when developing a business plan. Relying on venture capital money as the main source of capital is not a solution but just a temporary fix. One cannot and should not rely on investor cash to run their OPEX. Because relying on it only creates an unrealistic scenario where our income statement does not fully represent the viability of the business idea. If we put ourselves in the situation where we mostly rely on investor cash or a venture capital funding, then we are putting an expiration date on our business. We need to find alternative types of financing, such as bank funding, to be able to operate and support the internal logistics of our business in the long run. Failure to do so will only mask issues with the business case and hinder our ability to grow in the future.
It is obvious that in a start-up’s initial stages, it is extremely difficult to find or to have access to decent bank funding. For that reason most investors will look at seed or pre-seed investment as the only tool for launching their business idea. But, as soon as the the company has launched, it should strive to create a the business model where the financial projections for the coming years include a conservative cost of financing. Investors will always question any business plan or financial projection that does not include a realistic funding rate given the length of time that the company has been operating. Because the investor will want to see the viability of the business in the long-term and passed the tipping point of start-up growth. If the model is not adapted to be able to cover future financing cost once venture capital funding has dried up, then Entrepreneurs might want to reconsider or change the operating procedures to take into account those long-term financing costs.