Guide: Innovate Your Business Part Four

Source Cash-Flow and Funding

Funding

The number one way young companies are financing startups is from their own personal savings (bootstrapping). The second most common resource of funding is credit cards, and the third is from friends and family. Before you dive in, think of the best options for funding your business. Make your decisions wisely and consider how these decisions will roll out for the future of the company. Is bootstrapping your business going to be the way to go for you? Or will friends and family be your go-to?

However, some young businesses are able to explore conventional bank loans, that is, if you have the collateral to secure the loan. Iowa offers several small business financial assistance programs in the form of loans and forgivable loans. Eligibility for these programs may be based in part on demographic requirements, job creation, capital investment, wage standards, quality of employment offered and economic benefits for the state and local community.

According to the Kauffman foundation, less than 20% of fast-growing companies acquire venture capital funding. (Venture capital funds are managed through venture capital firms primarily made up of professional investors. The funds come through many different sources including individual investors, corporations and others.) With that being said, funding gaps are increasingly being filled by angel investors and peer-to-peer investors. (Angel investors are individuals who have the ability to provide startups with a small to significant amount of capital. This capital is usually provided to startups in exchange for some equity in the business.) Unlike venture capital firms, angel investors will not often require immediate returns and understand that growing a startup into a profitable business can take a long time.

Seeking funding from individuals outside your circle of friends requires preparation. In order to make your startup as attractive as possible for an angel investor, consider the following:

  • Prepare an organized and researched business plan.
  • Develop a deal sheet.
  • Figure out your valuation.
  • Create a business pitch.

Source Cash-Flow: The BCG Matrix

The growth share matrix was developed in 1968 by BCG’s founder, Bruce Henderson. The growth share matrix is used by about half of all Fortune 500 companies. The growth share matrix is a portfolio management framework that helps companies decide how to prioritize their cash. It is a table, split into four quadrants, each with its own unique symbol that represents a certain degree of profitability: question marks, stars, pets (often represented by a dog), and cash cows. By assigning products, services, attributes, etc. to one of these four categories, businesses can decide where to focus their resources to generate the most value, as well as where to cut their losses. Use the matrix to easily analyze the sources of cash flow that are most beneficial to your company and what sources are impacting your company negatively. 

The matrix reveals two factors that companies should consider when deciding how to create recurring revenue—company competitiveness, and market attractiveness—with relative market share and growth rate as the underlying drivers of these factors. 

Each of the four quadrants represents a specific combination of relative market share, and growth:

  • Low Growth, High Share. Companies should milk these “cash cows” for cash to reinvest.
  • High Growth, High Share. Companies should significantly invest in these “stars” as they have high future potential.
  • High Growth, Low Share. Companies should invest in or discard these “question marks,” depending on their chances of becoming stars.
  • Low Share, Low Growth. Companies should liquidate, divest, or reposition these “pets.”

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