6 Reasons Why Startups Continue To Rely On Investors
Every year, investors pour billions of dollars into new businesses.
Big data startups alone received $3.6 billion from investors in 2013.
In exchange for these funds, entrepreneurs must give away a significant portion of the companies they started.
Is it worth it? Why do aspiring tycoons continue to rely so heavily on investors?
Suzy Teele, Chief Operating Officer of SnapRetail, has some answers. Her firm raised $4.15 million in 2013 and is looking to raise an additional $500k to $1 million in 2014.
Click through the slideshow to see why SnapRetail and other firms rely on venture capital.
Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this slideshow.
© 2014 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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Most Entrepreneurs Aren't Born Rich
Some entrepreneurs are lucky enough to launch a promising startup without the need for venture capital. Most are not.
"It takes you a few years to grow your customer base to a point where you have enough revenue coming in to cover all your expenses," said Teele.
She said that this is a particular challenge for SaaS (software as a service) companies.Image Source: Wikimedia Commons
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Marketing Isn't Free
Even the best startup in the world needs a good marketing campaign.
"Starting out, you've got a lot of marketing expenses but not necessarily the recurring revenue at the level that you'd like to be," said Teele.
To fund that campaign, most startups will have to turn to venture capital.Image Source: Wikimedia Commons
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The Competition Is Fierce
Think you can start a competitive startup on a shoestring budget? Think again.
"Our primary offering is e-mail marketing," Teele explained. "And although we've got a twist on it given what we do -- we focus on independent retailers, and we also do a lot of the work for them in terms of creating the actual e-mails that they send -- it's a market that has been around since the mid-1990s."
Teele said that SnapRetail needed the funds in order to differentiate itself (and its brand) from the competition.Image Source: Wikimedia Commons
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It Takes Money To Make Money
The old saying is still true.
"We're in Pittsburgh," said Teele. "It's not really an expensive place to be. We're not in any kind of fancy facility.
"But we need to be able to get the product to a point and our brand to a point where we can get to profitability."
Without venture capital, that wouldn't be possible.Image Source: Wikimedia Commons
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How Much To Raise
Before deciding how much to raise, SnapRetail put together a proper business plan and made some projections.
"Then we estimated what investments we needed to make for our product to achieve those goals, and what investments we needed to make in marketing and we saw the gap," said Teele.Image Source: Wikimedia Commons
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How Much To Give Away
To determine how much to give away, SnapRetail worked with investors and other financial professionals to come up with an estimated value of the company.
"Then that's how you come up with the range that you need, and you have to decide whether it's worth it or not," said Teele.
"It's all a matter of what they value your company at -- at this point in time -- and whether they believe that we have the capability from a management team perspective and from an investment perspective to be able to take the company to that point," she added.Image Source: Wikimedia Commons
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