Early stage funding (seed funding) gives a business the initial boost it needs to develop a product, test an idea, hire a team and run basic marketing activities. Photo: Priyanka Parashar
Your business idea needs vital resources to grow that help it become a viable and investable business. One such resource is funding. For an early stage business, funding can come from four primary sources—yourself (bootstrapping), friends and family, external investors (angels, crowdfunding), or cash generated within the business (early revenue or sales).
Raising funds was identified as one of the biggest challenges facing India’s start-up community, according to research conducted by GrowthEnabler this year.
Every business needs funding at some stage. Early stage funding (seed funding) gives a business the initial boost it needs to develop a product, test an idea, hire a team and run basic marketing activities.
At later stages (series A onwards), once the business has experienced significant momentum or achieved early customer adoption and enjoyed noteworthy market traction such as press coverage, new partnerships, growth in users, clients and influential advisory board members, the need for external funding becomes far greater.
It is worth noting that 98-99% do not succeed in raising money (Forbes 2013). GrowthEnabler provides a step-by-step coaching for start-ups seeking to raise series A funding and has developed a blueprint that has helped many start-ups attract the right investment.
As an early stage business, there are three key questions you must ask yourself:
1. Do I really need funding?
Many businesses can get up and running, and even grow using bootstrapped funds. Taking money from external investors is not mandatory; it’s your choice.
If you decide to self-fund your business, it’s advisable to calculate your financial targets, budgets and cash burn rate, so you can determine whether your own fund pool will be sufficient to help you cross major milestones. You should know for how long you can run your business before you run out of cash; is it weeks, months or years?
It makes sense to inject personal funds into any early stage start-up as it provides maximum freedom to founders to make business decisions, without having to worry about investor needs. It also reflects well if and when investors do enter your business as it shows you have real “skin in the game”.
2. How much money do you need?
Your financial plan and cost budgets will give you a clear view on the cash flow runway you need to take your business to the next level. Business growth costs money and investors know this. Ensure that you have used unit economics to figure out the cost of building, running, delivering and innovating your product.
Remember to factor in customer acquisition costs, which includes sales, marketing and other business development expenses needed to win a customer. All these factors should help to come up with the total growth budget you need.
3. How much equity are you willing to give away for the right investment and investor?
If you are an early stage business or have an idea you wish to get funded and decided to take the external funding route, you will have to ensure you are fully prepared with the right investor pitch and compelling presentation to attract the right investors. You have a variety of funding options available such as angel investors (individuals who have personal funds to invest), investor syndicates and crowdfunding platforms.
To attract a smart investor (who has experience in your industry and has previously invested in and coached similar businesses), you must first do your homework:
l Go and find the right investor for your business.
Take control of your future and don’t let investors find you by accident. Use LinkedIn and other social media to find the ideal investor for your business. Study them. Get to know their background, past investments and business expertise. Use this knowledge to contact them directly or via a trusted contact or network.
Once you know your target investor profile, you need to create a compelling investor pitch and presentation that provides a summary of your business in under 15 pages or slides. Your ability to communicate your business idea and story will determine how it is perceived and accepted by an investor. Are you ready and armed to deliver a great pitch? If not, then reach out to an expert who can truly coach you to become great.
l Think like an investor
Any investor injecting money into your business will expect to take a share of your business—equity in return for money. This is quite normal. However, this is where most businesses get it wrong. Here’s why. Most businesses forget to put themselves in the shoes of the investor. For any deal to work, both parties must apply equal measures of empathy and emotional intelligence before, during and after the deal.
Wear the investor’s hat for a moment. Imagine it is your own money you are investing. What questions would you want answered? Here are some examples.
How would I protect my investment? What returns should I expect, and by when? Who is the team running this business and do I trust them? What excites me about this business? What are the biggest fear factors or risks? When will the business make money or break even, in which month? What happens if the business runs out of cash, will I follow-on with more funds? What gives me the greatest confidence in the business?
l Choose the right investor
Equally, as the receiver of external funding from investors, you will have questions you are seeking to answer. How much investment do I need to grow my business and achieve massive traction and results? Does the investor understand me and why I am passionate about this business? Is there a relationship chemistry between us? How qualified or experienced is the investor in my industry? Will this investor coach or guide me to make better decisions for the business? What is my business worth and am I giving away the right amount of equity? Will I get the freedom to run the business the way I see fit? What happens if the business needs follow-on money? Will this investor enable or disable that process?
In summary, raising funds for your business is a commonly used route to growth for most early stage businesses and start-ups today. It is important to understand the critical success factors that attract investors and lead to a trust-based, value-added relationship.