How Startups Survive the Lack of Liquidity

In his article “How Startups Survive the Lack of Liquidity,” published in Mercado magazine, Gerardo Soto describes how funding is a crucial aspect for the development and survival of startups.

The business model of each startup significantly impacts its financing approach. Some startups are based on traditional industries but incorporate technology and improvements to stand out, while others develop novel products or services. The latter often require substantial investment to survive for several years before achieving profitability.

According to Soto, there are two business models: B2B (business-to-business) and B2C (business-to-consumer). The B2B model tends to be more profitable in the short term as it focuses on corporate clients, while the B2C model may take more time to achieve significant commercial volume among end consumers.

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Regarding financing options, Soto highlights various alternatives such as angel investors, private investors, bank loans, crowdfunding, venture debt, among others. However, regardless of the chosen option, the capital acquisition process takes time, typically at least six months, and often extends to a year.

There are emblematic cases like Mercado Libre, which took nearly 20 years and significant capital investment to become profitable, as well as Stripe, Dropbox, and Alibaba, which were able to quickly monetize their business and require less investment time.

The article also underscores the importance of demonstrating the acceptance of the startup’s solution in its target market. Startups that take longer to monetize must show consistent sales growth, low customer churn, and other metrics that demonstrate the long-term viability of the business.

For startups aiming to be profitable without relying on constant capital injections, careful expense management and focusing on agreements that ensure profitability are crucial. The article also highlights the need to be flexible and make adjustments to the original business model as real traction is tested and demonstrated.

Finally, Soto emphatize the importance of financing for startups and the need to demonstrate their value to attract investors and ensure their survival. Furthermore, it mentions the importance of adaptability and constant adjustment of the business model to achieve long-term success.

How does it impact venture capital?

• The lack of liquidity can affect venture capital firms as it reduces the availability of funds to invest in startups.
• The scarcity of financing can lead to reduced activity by venture capital firms, limiting their capacity to support new projects and ventures.
• Venture capital firms may become more selective and cautious in their investments due to the lack of liquidity, making it more challenging for startups to access risk capital.

How does it impact startups?

• The lack of liquidity hinders startups’ access to financing, which can limit their growth and development potential.
• Startups may face greater challenges in meeting their operational needs, such as salary payments, product development, and expansion, due to the lack of available capital.
• The scarcity of financing can compel startups to seek more restrictive financing alternatives or scale down their operations, negatively impacting their ability to compete and survive in the market.

To read the full article, visit: Mercado