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UIJRT | United International Journal for Research & Technology | Volume 02, Issue 08, 2021 | ISSN: 2582-6832
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88
Startups and Sources of Funding
S. A. Janaji1, K. Ismail2, and F. Ibrahim3
School of Business, Universiti Teknologi Brunei, Brunei
Email: 1sitiaisahjanaji@gmail.com
Abstract— Startups often face pressures in
commercializing products and services. Considering the
limited capital and experiences, startups may not qualify
for institutional equity investment at the start. Therefore,
it is important for startups at the founding stage to raise
funding for short- and long-term growth. This paper
attempts to highlight relevant literature review and
research gaps related to startups’ sources of funding.
One of the significant findings in this paper is investors’
decision in providing funding. This paper will add
growing literature on factors that influence investors’
decision-making, and guide in examining startups’
stages of funding sources in Brunei.
Keywords— Startups, Funding, Growth, and Decision-
making.
I. INTRODUCTION
Startups are one of the most effective creators and
innovators of new ideas [1]. The creation of new jobs or
filling of patents are reflections of supporting local
innovative startups whereby new companies are
possibly to be developed, existing product ideas to be
expanded thus, strengthening the economic system [2].
Financial constraints, lack of commercial experience
and managerial are parts of startups’ difficulties [3][4]
as startups tend to rely on financial resources as well as
enabling infrastructure for survival [5][6]. Additionally,
startups rely on establishing trusting relationships with
key stakeholders namely financial resource providers
[7]. Thus, financial risks are often centered on sustaining
liquidity and securing finance [8]. Overtime, startups go
through several phases from pre-launch to maturity or
exit. However, startups’ lack of market legitimacy and
credibility reduce the ability to find institutional and
industrial partners for cooperation in the innovation
processes [9].
II. DEFINITIONS OF STARTUP
Startups are recognised as having high involvement of
innovation activities [4]. Startups are seen as a crucial
source of innovation [10]. The term “startup” originated
from the U.S. in the late 1970s and became popular in
the late 1990s as part of the internet hype and technology
and blazed out in 2000s [11]. Additionally, the term was
established by venture capital to distinguish between
new companies and small business which have scalable
fast growth potential, and the term is tied to risk funding
and technology mindset [11].[12] defines a startup as “A
temporary organization designed to look for a business
model that is repeatable and scalable.” While [13]
defines a startup as “A human institution designed to
create a new product or service under conditions of
extreme uncertainty.” Intriguingly, there has been
evolution of startups’ definitions from the 1970s till
present. For instance, [14] defines startups as “Young,
not yet established companies, which are set up to
realize an innovation business idea […].”
In the context of Indonesia, a startup is defined as a
temporary phase of an entrepreneurial venture trajectory
whereby entrepreneurs reshape and refine business
models with a vision to establish and refine business
models with a vision to establish a viable, scalable and
stable enterprise [15]. Moreover, a startup is a newly
young, founded company that is looking for a scalable
and repetitive model for an innovative marketable
product or service [16]. Based on [17]’s findings, most
of the interviewees had an unclear definition of the term
“startup”. In addition, the several definitions of the term
by interviewees included the size of the term, operation
duration, work difficulty, informality, financing
methods, growth, and absence of a finished product.
However, [17] emphasizes that the size of startups is not
often started. [17] concluded that albeit startups have
been discussed in both non-academic and academic, the
definition remains undefined. Thus, it can be suggested
that a startup is an innovative firm that has traits such as
risk-taking, proactive and seeks to grow continuously.
III. STARTUP’S SOURCES OF FUNDING
In general, startups’ capital can be raised from
entrepreneurs’ or founders’ personal fund, family,
friends, banks, business angels, venture capitalists, and
crowdfunding. Startups that can survive through the
“Valley of Death” (VoD) tend to seek venture capital
financing. At the later stage, startups either sell the firm
to larger companies or go public.
Financial bootstrapping is one of startups’ sources of
funding in which the term was first coined by [18]
whereby it allows a limited financial resource to start a
business. [19] identifies bootstrapping methods in which
seeding capital can be obtained from namely, customers,
internal business optimization, external financiers,
business partners, owners, suppliers, and employees.
The success factors of crowdfunding have been
UIJRT | United International Journal for Research & Technology | Volume 02, Issue 08, 2021 | ISSN: 2582-6832
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89
identified such as human capital attributes [20], terms of
equity offering [21], and third-party signals [22].
However, there have been unclear arguments about how
and under which conditions bootstrapping techniques
can take place [19].
Alternatively, business angels provide early stage in
filling the funding gap between the initial startup
financing and financing by venture capital
[23][24][25][7]. Business angels also invest in non-
monetary resources namely, experiences, knowledge,
mentoring and contacts [26][27]. [28] assert that startups
that are financed by business angels are likely to
improve the likelihood of survival for startups [28].
However, there has been a limited attention on how
business angels’ trust assists and disrupts the
entrepreneurs’ journey through the VoD [23]. In the
findings of [29]’s study, they found that about 70% of
sampled business angels invested in the seed stage
makes the highest percentage of all types of investors.
This resonates with the fact that the business angels
possess substantial entrepreneurship experience [26] in
which can facilitate startups to formulate strategies
while providing funding.
[23] established a process model of sustaining business
angels during the passage from research to
commercialization stage and bridge business angels’
investment, reinvestment, and withdraw funding
decisions to the evolution of trust in the entrepreneurs.
Albeit the fact that [23] highlight that busines angels’
trust is shaped by evaluations and perceptions of
entrepreneurs’ perspective to understand the trust
formation and evolution as their unit of analysis was
centered to business angels. Intriguingly, their analysis
illustrates that one of the startups was provided
reinvestment and recommended to new investors such
as VCS as the result of trust which has been consistently
built overtime [23]. Thus forth, the trust building cycle
empowers entrepreneurs’ journey to cross the first
stages of the VoD as well as securing to the last stage
“product/service commercialization” [23].
Venture capitalists (VC) are another source of funding.
A recent study on how VC investment is affecting the
startups’ sustainable growth and performance based on
the sample of 363 startups from 2000 to 2007 by [31]
found that startups perform and sustain when they
receive investment at the initial stage. How a startup is
capable to accept and exploit new resources by VC
companies determines the startup’s sustainable growth
and performance [31]. However, [32] found that the
relationship between VC investment and startups’
performance is still understudied.
Both investors and entrepreneurs face challenges in ‘thin
market’ in the early stage of entrepreneurial finance [7]
whereby [7] cite that the matching process is perceived
as a two-stage process; firstly, entrepreneurs look for
investors then investors will evaluate the entrepreneurs
who look for them [33]. However, entrepreneurs tend to
struggle in finding and securing investment whereas
investors tend to struggle in identifying and establishing
projects that have the investment criteria [33]. The term
“thin market” is described in the matching process in
venture capital as there are only a few applicable and
active investors for entrepreneurs and a limited
applicable group of entrepreneurs [33][34].
Venture capitalists tend to face decion-making problems
which lead them to rely on psychological state and
intuition in making decisions at uncertain investment
circumstance [3]. [7] identify four risks that are
important in the evaluation of the venture namely,
market risk, technology risk, finance risk and policy
risk. [7] cite that investors make contract on milestones,
develop KPIs, and limit the commitment in the early
stages for ventures to unlock further investment [36].
The effect of psychology on individuals into decision-
making is systematically raising upon concerns on the
decision making under bounded rationally condition
[35][37]. Prospect theory has been developed to
represent the behavior of venture capitalists’ decision-
making [38]. This reasonates with the framework of
prospect theory [39] which is perceived to be an
adaptive framework in reality.
Lastly, crowdfunding is a new emerging landscape for
financing projects whereby [40][45] highlight that
crowdfunding has emerged as a market for founders
where they can raise money from close networks
including family, friends, customers, and current
stakeholders as well as mass number of investors.
Unlike other sources of funding, the distinctive
crowdfunding’s characteristic is that funders do not
necessarily possess profession investment experience
and may likely to have other motivations than financial
return expectations [41]. [44] cite that over 75% of
successfully funded projects delivered later than the
expected time while some experienced delays [48]. [29]
pinpoint that there is a similar relationship between
venture capital and crowdfunding in which the
development of crowdfunding could derive from the
development of tradition forms of entrepreneurial
finance (e.g., business angels and venture capital). [44]
highlight that crowdfunding can serve as an introduction
UIJRT | United International Journal for Research & Technology | Volume 02, Issue 08, 2021 | ISSN: 2582-6832
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90
prior to traditional finance. The openness in the
innovation process and great amount of information
including ideas and sources of external knowledge
provided to crowd funders would increase the level of
innovation [52].
However, the success of crowdfunding also lies on
sophisticated investors’ presence who have public
profiles in websites or social media that attract other
investors to the campaign [42]. In general,
crowdfunding is more preferable due to the weaker
control rights by crowd funders [49]. To some extent,
successful crowdfunding campaigns may not require
assistance from venture capitalists and lessen the
information asymmetry as it can be seen as a pre-test for
product commercialization [50]. In the findings of [51]
on the linkage between venture capital and
crowdfunding, it was found that firms that raised a large
amount from crowdfunding expands the entrepreneur’s
autonomy and provides signal on the success of the
project although venture capitalists demonstrate more
indication of success. Hence, [50] argue that venture
capitalists and crowdfunding can be substitutes.
This was emphasized by [43] that early investors are
critical for the success of a campaign as non-expert
investors follow investment decisions of reputable
investors. Similar to VC, investors in crowdfunding are
not often making rational decisions in funding decisions
[44]. It is suggested to further research on how
regulatory institutions, approaches and culture affect the
development of equity crowd funding market as well as
entrepreneur’s’ motivations, matching of entrepreneurs
and investors, and investment dynamics [46].
IV. CONCLUSION
This paper has briefly discussed the types of startups’
funding and research gaps that are possibly to be
followed up in authors’ research. This paper provides
understanding that financial is one of the main
challenges in which obtaining funding for each growth
stage of a firm requires certain criteria and capabilities.
Crowdfunding appears to offer alternative opportunities
in financing innovative entrepreneurial firms. It should
be noted that the role of entrepreneurs’ networks,
research institutions, and universities is important to
new venture performance.
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