Startup Bonds
An Alternative to VC Funding for Technology Startups
Trends opening up the
possibility
of smaller rounds of funding
Currently, convertible notes and other alternative financing
structures for startups are available only where the funds required
by the entrepreneur are smaller than the typical VC investment. For
investments of $2m or more, the VC-Preferred model is still the only
significant option available to entrepreneurs[1]. There are some
trends that are leading to the reduction in cost of setting up
certain types of technology startups and possibility of startup
companies being funded solely through Startup Bonds and other
structures.
Significantly for many software and media-based startups, the cost
of operating and hosting Internet websites has dropped rapidly in
recent years. New software development tools automate tasks and
enable engineers to achieve more with fewer resources. Combined with
interoperability trends, it is quicker and easier to develop new
software-based products and technologies. Interoperability
essentially involves creating new products from building
blocks—components that are available off the shelf instead of
building them from scratch. These building blocks are available as
the result of new software standards and initiatives such as
Microsoft .Net, OASIS, SOAP[4], Open Source[5] movement, Java and
Javabeans[6].
Interoperability applies to other technology sectors such as
Semiconductors, but the costs involved in designing a new hardware
chip is significantly higher than experienced in the software
sector.
Outsourcing of development and engineering tasks to countries like
India, Vietnam and China can reduce the product development costs.
The Internet has brought down the cost of reaching customers
resulting in reduced sales and marketing for companies that are able
to reach customers in this way.
So, as VC’s raise larger funds and focus on multi-million dollar
rounds of funding, there are an increasing number of entrepreneurs
that are able to form startups and grow their businesses with
smaller financings raised in the form of convertible notes. If
properly structured, these entrepreneurs may be able to retain
control of their startups and they will not be forced to adopt the
VC-Preferred model.
[1] Fenwick & West quarterly
review.
[2] The .NET framework created by Microsoft is a software
development platform focused on rapid application development,
platform independence and network transparency. .NET is Microsoft's
strategic initiative for server and desktop development for the next
decade. According to Microsoft, .NET includes many technologies that
are designed to facilitate rapid development of Internet and
intranet applications.
[3] Open Artwork System Interchange Standard (OASIS (TM)) is a
specification for hierarchical integrated circuit mask layout data
format for interchange between EDA software, IC mask writing tools
and mask inspection tools.
[4] Simple Object Access Protocol. SOAP is a lightweight XML based
protocol used for invoking web services and exchanging structured
data and type information on the Web.
[5] In general, open source refers to any program whose source code
is made available for use or modification as users or other
developers see fit. (Historically, the makers of proprietary
software have generally not made source code available.) Open source
software is usually developed as a public collaboration and made
freely available.
[6] A reusable component that can be used in any Java application
development environment. JavaBeans are dropped into an application
container, such as a form, and can perform functions ranging from a
simple animation to complex calculations.