Red Rocket Ventures Blog (Growth Consulting, Small Business Experts)

I have had hundreds of startups reach out to me at Red Rocket looking for fund bringing up assistance. Most with starving, passionate entrepreneurs seeking to build a great company in their space. But, it is normally the technology startups that get through the filtration system of what I believe is “fundable” by professional business capitalists, predicated on my interactions with those investors. Which leaves many of the startups in other categories (e.g., CPG, retail, restaurants, real property, manufacturing) struggling to secure startup capital.

Today’s lesson will address why that is the case. Technology startups typically have normal business/execution risks that VC’s are prepared to take, especially after they have flushed out the concept seeing a material proof of the idea already acheived before trading their capital. But, think about other startups. Restaurants and retailers have the excess risk of real property locations (e.g., what happens if the road you can be found on moves under building).

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They also have the additional inventory obsolete risk (e.g., what goes on if you pick the wrong products to sell). So, rather than taking on multiple types of risk (e.g., execution, real estate, inventory), the VC will typically take the other dangers from the table, and concentrate on technology startups where the risks are much reduced.

The cost of building a technology startup has dramatically reduced over the last decade. No more do you need to pay for hardware, or code commonly-used tools, or pay for big support groups. Today is hosted in the cloud and use open source software Websites, taking the cost of the build-out down from the thousands a decade ago to the thousands today.

Compare that to the multi-million dollars of capital necessary to launch a new big box merchant or manufacturing unit or real estate development. Or, the additional capital required to fund all the inventory that goes therein. Or, the additional financial burden of a long-term real estate lease if the business fails.

The VC’s mentality is why invest a lot of money upfront (or higher time if things switch south), when you’re able to invest a little profit a tech business, for the same big upside results. VC’s just can’t stand startups that are human-supported businesses out of the gate. People cost money, people are hard to recruit, human-driven businesses are just less scalable than a simple software-as-a-service business, as an example.

Why invest in a 25% gross margin business, when you’re able to invest in a 90% gross margin business, is the mentality, when you’re able to flow thru all those extra dollars to the bottom line. Human-powered businesses typically get buyer attention later in their development routine, when private collateral firms begin to take notice, that have different investment goals. That which was the last non-tech company to look public at a valuation of 10x revenues? Most other industries are respected with a lot more conservative EBITDA or net gain-based metrics. Hopefully, you now have a better understanding to why VC’s bias-technology startups.

Do you need transportation such as cars and pickup truck, van, forklift or vehicle? How many other plant and equipment are should start procedures as well as just what is required over the life span of the business? This analyzes the monitoring elements of the business. It asks what kinds and level of capabilities are required to run this specific service? Who’ll handle business?

What jobs are needed as well as that will meet those jobs? Seriously, you will need to look at the skills needed by this business chance and compare them to your very own abilities. Do you have the abilities called for to undertake this organization? If not, can they be gotten conveniently? Are you considering acquiring these skills also?