Wednesday, October 2, 2013

The Dot-Com Boom: Perils and Promise of Rapid Growth through Incorporation

The year was 2008 and a new startup called Groupon took the Web by storm.
Groupon’s introduction into the marketplace spawned countless copycats and by 2011 it had already raised more than $1 billion in funding. However, as quickly as it grew … it just as rapidly fell.
The rise and fall of Groupon is but one of the many instances of a business growing too quickly in this dot-com era. Rapid expansion without a firm revenue method has seen the demise of many exciting tech startups but troubles in profitability are but one element of the equation.

Rapid growth often leads to quick, brash decisions in areas such as:

  • Incorporating too early
  • Hiring too many employees in a short amount of time
  • Accepting funding without a thorough legal examination

More often than not, small businesses jump the gun to incorporate in a ready fashion because they feel it’s essential for protecting their assets. The point of incorporating, after all, is to protect personal liability in the financial obligations of the business.

A peril that comes about from quick incorporation is the sheer amount of paperwork required to protect the IP, ownership, and assets of the business. Introduction of shareholders and boards may take away the vision of the original business owner if there is a lapse in legal due diligence.

However, despite the perils, incorporating a business gives it a chance to procure capital.
Elite Business Finance, a company that provides financial services to small businesses, has this to say about initial capital gained through incorporating:

“By incorporating, these businesses gain a certain level of credibility that they perhaps lacked before in the eyes of most banks. This extra showing of legitimacy then plays into the small business owner’s favor when applying for business loans, especially when these loan requests are in larger sums totaling more than $350,000.”

There are many additional benefits that come to motion once capital has been raised via incorporation:

  • It eases the process of becoming a publicly traded company
  • It allows the company to increase capital by selling securities
  • It gives the corporation tax benefits and breaks
  • It increases the chance of additional funding from sources

With funding in hand, a business can begin work without falling into common mistakes. The funding will provide the business with an appropriate budget to conduct robust market research, product and service development, talent sourcing, and intellectual property rights.

Of all this, the underlying benefit of gaining legitimacy is one of the most powerful.
The Dot-Com era has allowed any business with access to programmers and developers to create an online presence; sometimes these are shell companies masquerading as legitimate businesses because the Web gives such a rapid platform for growth.

An individual can quickly create an online presence, inject their product/service into the marketplace, rattle the consumers, and bail on the operation before many take notice.
Having official documentation, through incorporation, brings stability and peace of mind to investors and consumers.

Despite a few perils associated with rapid growth and early incorporation it’s apparent that small businesses taking this leap into legitimacy has profound benefits when procuring funding.

This Guest post was contributed by: Rachel Matthews 


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