Financial Management for Technology Start-Ups: 2021 Guide

A startup is not suited for everyone. Being an entrepreneur is very demanding. You have to be efficient every step of the way. And financial management for startups is not one of the exciting parts. 

Unless you have an investor willing to finance all your requirements, you have to optimize your cash flow and minimize capital expenditures yourself. Because of fluctuating accounts payable and receivable, it is challenging for startups to forecast their short-term assets.

If you think that only a great idea makes a startup successful, you are mistaken—money matters. By money, I don’t mean the funds in your bank account. 

Usually, when someone starts a business, they focus on their products and services and ignore financial issues. Managing your company’s finances may seem like a grueling task, but it will surely benefit you in the future.

Business startups should build on their product knowledge, digital savvy, and knowledge of market forces. Technology startups also need a unique understanding of accounting, the knowledge they need to implement their more innovative business models, and the modes of working that drive technology business to succeed. 

Before seeking help from investors, you need to be clear about your priorities. You should ask yourself: 

• How much money do I need? 
• What is my equity valuation? 
• Do I have the assets I need to run my business? 
• Will any of my co-workers, family, or friends invest in my business? 
• Do I have any open lines of credit?

Once you begin your journey, you will probably reach a saturation point where you will need some financing. Let’s check out the sources that can help you manage your startup finances.

Most Common Startup Funding Sources 

Your Personal Savings

You should be putting your money where your mouth is and go out and fund those early steps yourself. 

Investors will always be trying to figure out how you invested in your idea, and funding your startup is a good sign for them.

The Business Itself

The preferred source of funding for a startup: Let the business pay for itself and grow its business through incoming revenues. It is the best kind of financing that shows your business is taking off. 

However, your difficulty here is timing because expenses tend to come before income. Therefore, it would help if you found a way to get the money upfront. A great way to do this is to work with annual plans and prepaid orders.

Growing your business this way should keep you in complete control, and you will have a constant reminder of the importance of sales.

However, this is the hard way. Limited resources can dramatically limit your growth, while the pressure of fulfilling promised orders can be overwhelming.

A great read is John Mullins’ book, The Customer Funded Business, if you have some spare time. 

Friends And Family

Without an established track record or in the early days of your idea, there may not be many people who believe in you except your friends and family. 

The flexibility of timing and the faith of the people you know best make this an attractive funding source.

However, be careful. If you do not do it right, it can blow up more than just your business. It can have a lasting impact on your social life. It is not uncommon for friends and family loans to lead to unintended consequences, resentment, and even lawsuits.

Protect your friends from themselves. Properly evaluate whether the financier can take a hit if things go south. Be honest and open and never ask for too much money. You don’t want to lose a significant portion of your parents’ savings a month before retirement.

Make sure you understand your sponsor’s financial situation and their ability to earn back any losses.

You need to be clear about the terms and write them down. Once you have set reasonable expectations, negotiate the terms and write them down for both parties. 

It may seem redundant to you, but even a simple contract with some established rules will go a long way toward preventing disputes later on. It also ensures that everyone thinks through the implications and that everyone is on the same page when the money is handed over.

Government Subsidies And Grants

Governments are usually eager to support innovation and startups in their communities. The competition is rather fierce, and the criteria are tough. 

Therefore, access to this relatively cheap startup funding can be an absolute game-changer for your startup. 

Grants vary by country and region, so make sure you assess your ecosystem’s capabilities correctly.

Some countries, such as Canada, have programs that support research, development, and applied sciences, such as the SR&ED financing program.

The SR&ED (Research and Experimental Development) program is the leading investment incentive program created by the Canadian government. It provides financial support to companies that create new or improves existing technologies to stimulate scientific progress in the country. As one of the global leaders, many countries have followed Canada’s lead in creating similar programs.

In general, grants tend to focus on high technology, science, and medicine. They often focus more on specific projects rather than funding the entire business. 

They usually require that you match the funds that are given with other types of funding. It means that if the grant is $100,000, you will have to get $100,000 in private financing.

Also, grants often require you to be very detailed about how you will spend the money, and you will have various controls after that.

Finding the right grant isn’t easy, as it’s usually not widely advertised. Therefore, you should talk to other startups in your area and ask them about these grants. Find official grant information and sign up for their newsletters, so you always know when a new application is open.

Once you find a specific program to apply for, make sure you fully understand the application process, as each grant will have specific deadlines and requirements. Typically, the minimum requirements are as follows:

• A detailed description of the project
• Explanation of the project benefits
• Detailed cost plan
• Detailed experience and knowledge of project managers

You should be prepared to spend a lot of time. Almost all of the information will have to come from you as the founder. While many specialized firms can help you with this process, they are not cheap.

Incubators And Accelerators

Another way to get seed funding is to go and join an accelerator or incubator program. While business accelerators and incubators are often seen as the same concept, they are not. 

Both offer business networking, mentorship, and some form of a structured program, but they have different goals.

As TechRepublic puts it, “an accelerator is a greenhouse for young plants with optimal growing conditions, an incubator combines quality seeds with the best soil for germination and growth.” 

The best-known business accelerators are Y Combinator and Techstars. The program typically begins with a round of applications. 

After which successful companies are invited to participate at a specific location. There, companies take part in an intensive mentorship program for weeks to months.

The accelerator offers a wide network of investors and mentors who can be of tremendous help in building your business and raising future capital. 

Most of them also end with a demo day, inviting investors to see your company. A relevant example of this approach is the Y Combinator Demo Day, which is seen as an essential day by any Silicon Valley investor.

Accelerators, on the other hand, are not free. While some provide a fixed amount of seed funding for a small percentage of shares, others may try to include you in their business network or may even charge an entry fee.

Most incubators have co-working space, a monthly rental program, and mentoring to connect to the local community. 

It is why companies will be invited to work at the same location. In this case, all companies can learn from each other’s experiences, honing their ideas, working on their products, tinkering with product markets and business plans.

Offering no direct startup funding, incubators can be an essential part of bootstrapping your business, as the space available will reduce your costs. In contrast, the incubator is full of advice and tips.

Many incubators are run by professional investors, government agencies, and large companies. Depending on the sponsor, incubators may focus on specific technologies, verticals, or even markets.

Bank Loans

A bank loan is money you borrow from a bank over some time. Depending on whether you borrow money against an asset or not, it is called secured or unsecured. 

Whether the interest rate is a fixed advance or can change based on certain market changes may be fixed or variable.

To get a loan, you need to convince the bank that your project is viable and your capability of paying back the loan on time without any issues. 

Your application is thoroughly reviewed, and usually, banks will focus on your future cash flow, which is not always good for startups.

Debt is not the same as equity because you will need to pay back the loans, including interest, on the agreed-upon date. Failure to do so can lead to bankruptcy, a scenario in which the debt holder will always have more claims on the business than the regular shareholders.

Banks offer many products specifically tailored to a company’s needs in different situations. It is imperative to make a clear distinction between loans for short-term needs, such as working capital, or the longer-term liabilities we are talking about here.

Pros:

• You retain your equity and thus claim any future profits.
• Banks do not interfere with your business (as long as you follow the payment terms).

The Cons:

• Bank loans are less flexible because they tend to stick to their terms.
• You will probably have to pay a fixed monthly amount.
• If you don’t pay, it can lead to bankruptcy.
• Everything you borrow against is at risk and can lead to loss of control.
• Variable interest rates can go up at a bad time.

Banks get many business proposals, so before you make your bid, ask questions about what they will need and make sure you bring everything in one package.

Generally, you will need the following:

• Cash flow planning over the term of the loan and a detailed business plan
• Statistics on growth and revenue composition (client base, industry base)
• Relevant information about your team, sector, track record, and investors
• Have a clear motivation as to why you need the loan
• Your recent financial results support any assumptions in the above materials.

Venture Equity

Equity financing allows you to raise capital without having to pay it back, which is great! However, instead of repaying the loan and bearing the brunt of regular interest payments, you will effectively sell parts of your business in the form of stock to an investor.

It is a good way to raise a lot of capital and potentially attract smart investors. The main disadvantage is probably the loss of control.

Unlike a lender, you should expect a shareholder to understand how to run your business. Therefore, be prepared to manage their expectations and advice.

Every share sold represents a unit of ownership of your company. Therefore, if you issue 2,000 shares and sell 1,000 shares, the buyer will own 50% of your company.

That buyer will now have their fair share of all future profits and dividends. They will be rewarded in the same way that you would be rewarded for any increase in share.

Depending on the type of stock you issue, the investor will also have the right to vote and participate in important decisions since she will likely have a seat during board meetings.

Generally, you can issue two forms of stock: common stock and preferred stock. Concerning common stock, shareholders are entitled to all corporate profits and dividends and rights to vote according to their ownership.

Preferred stockholders have more rights to the assets of the firm than do common stockholders. It is what is called seniority over common stock. 

At the time of liquidation, holders of preferred stock will be paid after holders of debt (more senior) and before holders of common stock. Also, the preferred stock often has a fixed dividend and no voting rights.

Venture Debt

While venture capital is a common and attractive source of funding for startups, it often requires you to give up a portion of your business. It is why debt financing is so attractive, as you can keep your capital.

But banks, which are the biggest borrowers, are very conservative, and startups don’t quite fit their type of analysis, making it difficult to access debt financing. 

It is where specialized venture capital lenders come into play, as they specialize in lending to venture-backed companies.

In many ways, these venture capital loans look and feel like conventional bank loans, but there are some essential differences.

Firstly, there is a difference in the lender’s analysis. Bank lenders tend to look at your income and cash flow to assess whether you can repay the loan. 

It is not possible for many startups, so venture capital lenders specialize in evaluating other factors such as investors’ quality, business plan, capital strategy, team quality, and technology.

Then there is the difference in collateral. Banks rely on machinery, buildings, and equipment. Venture capital lenders tend to rely on intellectual property as a form of collateral.

Also, venture capital lenders ask for a sweetening warrant to sweeten the deal. Like stock options, a guarantee allows the holder to purchase shares later at a set price, creating another financial incentive for the lender. If they relied only on interest to make a profit, that interest would be too expensive.

Financial Management For Startups – Online Tools:

In the age of the Internet, you can always seek help online. Here is a list of online financial management tools used by startups to optimize their financial health.

Salesforce Invoice And Payment Platform

Tracking invoices and payment statuses is critical for startup owners. Salesforce partnered with Taulia to introduce this new tool that allows you to track invoices and select early payment options. 

This integrated platform is free to use. It is one of the essential financial management tools for startups.

BodeTree

This tool tracks your business’ finances regularly. Cash Tracker is their advanced feature that helps you visualize your income, expenses, and profits. You can use this tool to view and manage your finances. 

It will help you set goals, calculate your company valuation, make industry comparisons and build a strategic roadmap covering a number of areas of building a successful business.

Bench

This online accounting service arms you with a personal, professional accountant. It is free paperless accounting that keeps your financial information secure at the bank level, and tax support to reduce the stress levels associated with the business can be used with Bench.

To Sum Up

The first stage is probably the most difficult – one idea is not enough. The more you can show (besides your idea) to an investor, the more likely you will get funding for your startup.

Think about your project’s future and try to develop an MVP that should be the starting point for attracting more investors (VC funding, IPO, ICO, etc.) and growing your business.

Whichever type of funding you choose to start with, make sure you have an ROI plan in place. Now you should understand more about who, what, and how to attract angel investors, as well as other investment opportunities you can take for startup financing. 

Choose what works best for your company, and best fits your strengths. If this seems too much for you, you can always find a business partner who can take on this “dirty” work.