No matter how bright and exciting your startup idea may be, without a solid funding round, it will not see the light. This can be a party pooper especially for first-time entrepreneurs and kill the thrill that accompanies the early days of their startup journey. Securing funding allows entrepreneurs to develop product prototypes, get a foothold in the market, and secure future funding rounds.
Yet, convincing experienced investors that your idea is viable and that your team has what it takes to develop a service or product that will scale and generate long term profits is not easy. It requires preparation, research, planning, and most of all, adaptability. Your presentation to investors should prove, not just tell, that your value proposition is indeed unique, fulfills market demand, solves a problem, and will generate a sizable return on their investment.
Following are the main ways you can attract funding for your startup business. Note that these are general steps and the details may vary according to the type of business and business model of your startup. The key is to ensure full preparation in every step, in ways that would provide answers to every possible question from your potential investors, and ensure your business has the potential to scale to new heights.
Set Your Funding Objectives
First off, you need to clarify the purpose of your funding: why do you need funds and what will the funding go toward? Is it for expansion, new product development, or a new service you are introducing? Any funding objectives should be documented with a written plan that justifies why the funds are needed and how they are being spent. The plan should be a time-bound roadmap supported with proper evidence that provides it with solid ground. This will keep you on track throughout the process and give investors a concrete picture of how your plan will progress.
When presenting these objectives to investors, be ready to answer specific questions. These include but are not limited to:
- How will the funds be used? How will they be allocated across your value chain?
- How will they add value to your organization and contribute to its success?
- How will you make the spending transparent and efficient?
When it comes to resource allocation and distribution, a detailed use of funds is key to gaining their trust. Investors should see they are putting their dollars in the right place – one that expects growth and success. They want as few unknowns and risks as possible and you combat this with information.
Find a Strategic Partner
As the saying goes, “Two heads are better than one”. Finding a strategic partner for your startup can help boost your business development. In one study, more than 80 percent of companies said that partnerships were critical for their long term growth. A trustworthy partner can help you discuss ideas, provide invaluable feedback, and help you identify gaps or weaknesses which you may not see from your perspective. Plus, your partner can join in with his funds to get the startup off the ground. More so, a partner shares in the liability with you, so you won’t be left alone in the storm if things go south. Finally, having a partner can send a positive message about you with investors, who would see you as someone with a collaborative, teamwork spirit.
Prepare Your Financials
Preparing your financials includes your budget and projections. A full budget for your startup can be easier said than done. After all, you are forecasting what you will be doing with the money you have not yet earned. Still, there are basic startup expenses that need a budget early on, without which your startup cannot commence its operations:
Legal Costs: These are the basic costs related to the lawyer fees, legal protections, copyright protections, and outsourced legal consultations.
Human Resources: This includes not only employee salaries, but also the costs of providing their training, benefits, safety, and health. In most cases, startups spend up to 30 percent of their overall revenue on human resources expenses.
Equipment: The cost of equipment varies according to the type of your startup business. At a minimum, they would include computers, telecommunication equipment, servers, office furniture, vehicles, or restaurant equipment if your startup is within the food and beverage sector. Note that you can finance your equipment in various ways, such as loans, leases, or lines of credit.
Marketing and Communication: Once your business is up and running, you need enough funding to expose it to the market and promote your value proposition. Otherwise, you risk not achieving enough sales. So, make sure you set a budget aside for online marketing (Pay Per Click advertising, social media boosts, influencer advertising) and offline advertisements (billboard ads, brochures, posters) and of course, a fully developed website.
In today’s technology-driven world, you can start by spreading the message about your business using free social media platforms until you allocate a sufficient budget to boost your online presence.
Preparing a budget based on the above elements will inform your investors what your startup needs to launch and support the most basic operations of its value proposition before your cash flow becomes profitable.
Be careful though – do not get too comfortable with the numbers. Do try to minimize your initial business costs. A proper re-evaluation of your startup costs after you finish your budget may lead you to realize that you do not need as much money as you first thought. For instance, consider remote work possibilities and shared office spaces instead of having to pay for a fully rented office. Consider paying for goods and services on the go instead of having to buy large quantities upfront. Look for cost-effective materials. Think out of the box to keep your costs as low as possible. This will reflect positively with the funders who value your commitment to fiscal responsibility.
After your budget is complete, it is time to set your financial projections. This would help you and the funders better determine whether the business will eventually be profitable. Your projections should include the following:
- Key financial assumptions: cost of product development, the price per product, and the expenses outlined in the budget. This will allow you to determine whether the projections look reasonable.
- Key financial projections: Usually for a 3-5-year period, include the profit and loss statement, cash flow statement, detailed income, and expenses categories, projected balance sheet, and main assumptions.
Note that if your financial projections do not match up with your actual results, do not worry. These projects can be revised as you navigate through the stages of your business.
Choose the Right Investors
Now that you have your value proposition, your budget, and your plan have been presented with proper research, you are ready to make your case and pitch to investors. Yet not all investors are suitable. The right investor should be experienced with startups, whether by funding them or building them. A Google search isn’t your way to find such potential supporters. Here’s what you need to do:
Online investor communities: SeedInvest, Crunchbase, Kickstarter, and others are examples of relevant online research tools that can provide you with the investor information you need.
Your lawyer: Given that fundraising deals involve a great number of contracts and legal documents, there is a high chance that your lawyer may have a deal with previous investors. Ask him to recommend a few and get in touch with them.
Your family and friends: The advantage of reaching an investor through your personal network is that they help you start with a basic level of trust and credibility since you’re being properly introduced by someone the investor already knows. Depending on who refers you to them, some investors may be willing to fund you right away, with minimal doubts about your business plan. In all cases, make sure you connect with key leaders in every industry, peers, mentors, consultants, and others who are known to have a wide network of potential investors and are familiar with the startup fundraising scene.
The angel investor: Angel investors are high net-worth individuals who are experienced in supporting startups with relatively high amounts of money. While it may not be difficult to spot them (they are often well-known in the startup scene), the challenge is in convincing them that your business idea is worthy of their investment. A major advantage about angel investors is their wealth of experience, wisdom, and mentorship. This can add value as important as the capital they may wish to contribute.
Venture capitalists (VCs): These are firms that invest in a startup’s early stages in return for a share of the equity. The objective of the VC is to generate return within a relatively short period, typically withing 5 to 8 years. So, they often invest in high growth sectors, such as biotechnology, software, media, and tech. Note that if you choose to go this route, you should be ready to give up a portion of your startup business to the investing firm. There is nothing wrong with that, especially since many VCs provide you with more than just money: other resources such as expertise, coaching, training, guidance, and logistical support can come in handy.
Examples of venture capitalists are Urban Capital Network, who look for startups with a proven team and a business model that is ready to be implemented with a promising potential to scale.
Prepare Your Pitch
Now that you’ve identified a list of potential investors, the next step is to prepare a compelling pitch to prove to your investors that your business plan is worth their precious money. At this point, it is not just about the numbers, theories, or visuals. It is also about how well you present your business idea, how excited you are to see it happening and how passionately you defend it. Your pitch needs to show the investor how deeply you believe in your vision through a captivating narrative and a purpose-driven attitude. Your investor should see that your business is worth investing in, not only because of what it promises, but also because of the character of the person leading it.
Join a Program
If you encounter difficulty in finding the right investor or feel lost and confused about how to move forward, don’t give up just yet. Some programs are designed to support you with investor outreach, financial due diligence, and other startup services. One such program is Seed Round Capital, which provides funding, mentoring and operational support to early-stage tech startups. Such a program can help you find investors that are strategically aligned with your business idea, significantly reducing your fundraising timeline, and giving you an early competitive advantage.
In the end, having a business idea for a startup that you’re passionate about can be exciting. Yet the process requires preparation and an informed approach. Ninety percent of startups fail, even after funding, as most founders struggle to address uncharted territory. Becoming a seasoned entrepreneur takes significant time and learning. The ideas in this article can help you avoid common pitfalls and provide you with proven methods specially formulated for success.