Today there is a wide range of funding options for startups. More are on the way. There is rapid innovation in entrepreneurial finance. Many funding innovations are offered as online services. They are fundamentally altering the landscape of startup capital formation. These innovations are welcome.
These reforms are also introducing big changes. They are driving out many of the long-standing practices and myths of entrepreneurial finance. Here are five myths of startups being killed by innovation and Startup Myth Busting.
Myth One – The NDA.
Startup finance reform is the death knell of the ridiculous non-disclosure agreement (NDA). For years the first sign of an newbie entrepreneur was asking anyone to sign an NDA. Ironically, today’s Web-based startup sites for raising capital online are really a full disclosure agreement. They are a big, global megaphone for startups. Entrepreneurs plead for introductions to share their ideas. Some pay to get there idea out there. Not that the NDA was ever even considered by serious investors, it is good that it is now dead and gone.
Myth Two – The $500K Seed Round.
A few Web-generations ago, around 2000, the standard startup ask was for a $500K seed round. This was a counter-productive sum. It created many failed startups and disappointed investors. Sure, maybe it was more costly to develop a prototype or a minimally viable product (MVP) back then. Thing is, $500K is an odd sum. For most startups, it’s way too much for proof of concept; for all startups it’s way too little to scale a company. Good riddance to the reflex request for the $500K Seed Round.
Myth Three – The Long-term 1099 Consultant.
Too often founders and entrepreneurs believe they can run their firms with so-called ‘consultants.’ It’s not so. Startups may not claim technical talent as consultants. (The IRS is excited about startup finance reform too.) If you pay anyone more than $600 in a year they are your employee. If you ever supervise or otherwise tell the person how to do the work, they are no longer an independent contractor – they are your employees. For employees, of course, you need to pay withholding, Social Security, Medicare, unemployment insurance and other taxes. Sorry, filing the IRS 1099-MISC form, year after year, for startup talent, won’t cut it anymore. There is an IRS crackdown on startups. You need to make your loyal people employees sooner-than-later. You’re still not sure? Use convenient IRS Form SS-8. Note that if you have been using so-called consultants in your startup for a long time, you may have a HUGE bill for back-taxes.
Myth Four – Dog Food.
Eating your own dog food or ‘dogfooding’ is using what you build internally. Today’s investors don’t care if you use your own products. Dogfooding is narcissistic. In Lean Startup it’s waste. Remember, the purpose of business is to create customers. Usually means getting out of your chair and in front of prospects. Today’s investors require and measure traction, social proof and testimonials from real, breathing customers. It’s okay to use your product, just don’t overdo it.
Myth Five – You Can Go It Alone.
Startup finance reform is killing the myth of the lone genius entrepreneur fighting gallantly against all odds. Rather, the unwinding and democratization of capital formation demands hyper-collaboration. Not surprisingly, the online sites for startups raising capital have discovered they are first and foremost social network services (Gasp!). Fluid, proximate interactions help compose novel configurations of talent, capital and ideas for collaboration and entrepreneurial achievement. If you think you can go-it-alone in today’s fast-moving, transparent entrepreneurial capital markets you are on the path to oblivion.
The frictionless flow of capital, innovation and talent is important, ambitious and underway. Over the last 24-months novel Web-based applications have achieved fundamental advancements in the curation and widespread syndication of startups, investors and talent. Startups are discovering entirely new methods of capital formation. Favorable government policies are easing regulatory requirements. As these developments unfold at breakneck speed, the myths and practices of the past crumble away. Both are propelling the future of entrepreneurial capital formation.
What Startup Myth are you busting?
