Posted by Early Growth
March 12, 2012 | 5-minute read (997 words)
High tech startups require a lot of cash up front to grow quickly. Funding solutions range from venture capital, angels and seed accelerator funding models to crowd funding and straightforward bank loans. Because traditional financing is often difficult to get for startups, fledgling high technology companies often rely on equity capital to provide the quick influxes of cash they need.
The Perils of Equity Capital
Using equity capital has one glaring disadvantage. Those who are funding you will own a piece of your company. The money is easier to come by, true, but heavy reliance on equity capital can get away from high tech entrepreneurs. You can easily lose control of your company and find yourself on the outside looking in when it's all said and done. To manage your company's growth, while maintaining control over the company's direction, you need access to banking solutions that are flexible, responsive and robust.
Many traditional banks have technology platforms that have been cobbled together using several different technology platforms and disparate back office systems that may or may not talk to each other. Internal politics, entrenched bureaucracies and an often stunning lack of imagination on the part of bank officers can impair their ability to serve you. Even some internet-only banks have simply glommed onto the same old out-dated systems and practices that plague traditional banks.
Emerging high tech companies must be nimble and fast. Entrepreneurs survive and thrive by jumping onto opportunities quickly, adapting to changing customer needs and taking rapid advantage of favorable conditions for growth. You need banks that leverage efficient technologies in a customer-centered service environment; banks that aid you in responding rapidly to unanticipated challenges. The trick is finding banking solutions that work the way you need them to work and not the way “it's always been done.” Banks will promise a lot to get your business, but sorting out the real deal from the pretty paintwork is tricky.
First Things First
Before you run down and wave all that venture capital you just landed in front of a pack of slavering bankers, assess your company's need for banking services.
- How will your company grow?
- What will you need capital for?
- Do you want to sell off a piece of your company every time you have to set up a production run or invest in research or would you rather work off a line of credit and reduce your reliance on equity capital?
- Ask yourself what stage you're at.
- Do you need seed capital, startup capital or working capital to get your company off the ground.
- Down the road, will you need mezzanine (expansion) capital to buy equipment, larger facilities, move into a new area?
- Will you need bridge capital to get you from your current financing to the next level.
- Does your accounting system work seemlessly with your banks online system?
While equity capital funders may be able to help you identify sound financial strategies that will work for you, consultants like Early Growth Financial Services can also help develop detailed plans to meet your accounting needs, funding challenges and financial requirements before you commit to a bank which might or might not be able to handle the rapid level of growth of a high tech startup.
The Dance of the Sugar Plum Bankers
One way you can choose a bank is by lining them all up and sitting through a series of presentations by bank managers, marketers or vice-presidents they have lying about for just such purposes. After you've met with a dozen or so, you'll notice that they all tend to run together.
Not so, if you've clearly laid out your financial needs list. Develop an evaluation instrument with your financial advisor. Use it with each bank or financial institution you talk to. Don't develop your evaluation instrument based on the first bank's presentation of its capabilities. It's too easy to miss something that's important to you, but which the first presenter didn't mention. With your checklist in front of you, you'll ask smarter questions and insures you cover the same ground with each banker. That way you compare apples to apples in terms of the banking solutions they offer.
Look for some of these offerings:
Flexible Financial Products and Services
– Products and services should be able to adapt to whatever stage of growth you're passing through or will be passing through on your way to that big initial product offering. Products and services should be comprehensive and competitively priced.
Online Commercial Banking
– A platform that accommodates multiple permission levels, multiple employees and which is compatible with your accounting software. You don't want to have to wade through bank staff to get access to all the information you need about your accounts. A robust, well-designed online banking platform puts financial power in your hands and limits the number of gatekeepers between you and your money.
Your Own Banker
– Make sure the bank or financial institution you choose has dedicated service representatives that understand high tech startups, work with them every day and understand what tech startups need in the way of banking solutions.
Flexible Lending Solutions
– The bank should understand how to manage risk through flexible lending practices. Many of the more hidebound financial institutions will try to eliminate risk altogether. This can get in the way of the risk-taking essential to tech startup success. Look for banks that understand this and can help you plan for it.
Finding a bank or financial institution that truly supports what you do can make all the difference.
Questions about finding your best banking solution? Let us know in comments below or contact Early Growth Financial Services.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial and accounting services to companies at every stage of the development process. He's a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.