RACO Investment Founder Randall Castillo Ortega discusses different ways to fund a startup

Financing a startup requires going to different sources of capital depending on the stage in which you are. We give you some ideas, so that you never get tired of trying. Moving forward with a good business idea, in many cases, requires capital to be able to tackle all the necessary tasks at the right time. Randall Castillo Ortega, the founder of RACO Investment in Costa Rica and Panama, offers different ways for entrepreneurs to find financial support for their startups.

It is very important to know which sources of financing one can turn to without paying an excessive or unnecessary price, especially in terms of equity. Castillo explains: “A startup is a new or young company that has great potential for growth and commercializes products and services through the use of information and communication technologies. It is a fast-to-market company to achieve the necessary growth and funding through digital transformation.

With pre-seed financing, there is only the idea. At this stage, it is time to look for partners and sign a Partners Pact with them. You will need funding from family and friends.

With seed funding, it’s time to validate the business and trade. Financing must be obtained through an equity loan or a business angel.

During the growth phase, the business model works and begins to generate cash flow. However, a capital injection is needed for the business to grow according to the business plan. This is where investment funds come in.

For companies in the scaling phase, business scalability means that the startup can internationalize and expand into different or complementary market segments with similar goals or trajectories. Expansion may be accompanied by alliances with other companies or the entry of private equity.

Finally, in the exit phase, it’s time to go public or sell to another company. Or not, depending on your objectives or the vision of the future of your company.

Even if the term doesn’t sound familiar to you, it should always be the first choice. Bootstrapping refers to the ability to self-finance, using only the capital provided by the founding partners and that generated by the company itself. It has one fundamental advantage; the founding partners do not lose equity and retain full decision-making capacity. There is no dilution from selling shares to investors, so you will still retain 100% of the business.

But it is also true that this mechanism is not feasible in some cases. The very definition of start-up implies the existence of costs that will appear before the phases in which the company generates sufficient capital flows to support the cost (break-even). Whatever amount you need, you have to keep in mind that any investor will basically value two things, the business plan and the team.

If the contributions of the founding members are not enough to cover these costs, you can always resort to family and friends. You will receive a “subsidized loan” without the requests of other potential investors to whom you will have to turn later. Although not set in stone, we could consider the need to cover between $5,000 and $30,000.

With the MVP in hand, we must start verifying the business hypotheses as widely as possible. Target customer segments need to be identified and reached. And for that, a greater investment will be necessary than what can be asked of the 3Fs (unless you come from a wealthy background).

“The funding and/or grant you secured in the pre-seed phase will allow you to verify business assumptions and start earning revenue. The business model is working and starting to generate cash flow,” Castillo adds.

Now, a capital injection is needed for the business to grow according to the business plan. And that’s where investment funds come in. The range of capital needed if your startup reaches this phase will vary a lot depending on the company itself, but we can talk about a range between $500,000 and $5 million.

This first round of investment is known as Series A and what the company is looking for is the investment needed to grow the revenue until it reaches break-even, with the revenue generated covering operating costs. The normal thing in this phase is to go to venture capital (VC) who will invest in your business if you are convinced that by increasing sales the business will increase its margins and therefore generate enough profit to recover its increased investment according to the agreed profitability.

The capital contributed by the VC will give you sufficient ownership of the company to control the decision-making bodies of the company so that you can ensure that your contribution is used for the agreed purposes. This is usually an investor who will remain in the company for a period of between 5 and 10 years and who will require the permanence of the management team of the startup. From then on, and if the business continues to grow, funding for Serie B, Serie C and, perhaps, exit will come.

About RACO Investment

RACO Investment is a financial investment company serving small and medium enterprises in Panama and Costa Rica. It was founded by Randall Castillo Ortega, an expert financial advisor who has his roots in the import and export industry in Latin America. The company has helped many startups find the financial backing they needed to get started. It has also provided bridging loans to help those looking to restructure or improve their operations.

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