March 21, 2016 | 4-minute read (799 words)
As a startup founder, funding is probably the top concern keeping you up at night. The questions running through your mind:
- How will I get funding?
- Who will I ask?
- How much do I need?
- Will it be enough?
Let’s talk about what you need to know before you seek funding for your startup.
One of the first questions to ask yourself is whose money will you use.
Will you use your own nest egg to fund your startup, or will you go the route of debt financing? In other words, will you take out loans and pay them back with interest?
One of the pros of using your own money is that you retain the profits and all control of your business if it succeeds.
Your other option is to seek equity financing from angel investors, venture capitalists and others. In this business model, you owe less money, but you’ll share the profits with your investors. You are basically trading equity in your company for cash.
Going this route enables you to raise large sums of money for your startup without going into debt. You will lose a bit of your control, giving your investors a “say” in your company. After all, they do expect a return on their investment.
Let’s say you decide not to self-fund and choose to seek funding from others. Here is what you need to know:
Have a Business Plan
The first item on your list is to create a business plan. Venture capitalists deem this your most important task, because without a business plan, they are flying blind.
You must create a plan that presents your overall business summary and a description of how it will make money.
In addition to your business plan, your investors will appreciate seeing one, three and five year plans. They want to see your goals and strategies for growth. They are looking for your “staying power.”
Conduct Market Research
Your investors want to see your market research. They want validation that the market can sustain your business and that your startup is viable.
This is the “proof” that your business plan is sound and provides you with numbers to back up your claims that your startup will be successful.
Prepare Financial Models
Venture capitalists and angel investors are smart, and they know how to drill through your materials to the proof that your business can actually make money.
Your financial models should include spreadsheets of projected costs, acquisitions, sales and revenue, profit margins and growth rates. Bottom line: they want to know when they can start seeing a return on their investment.
Ask Yourself Questions
Before you start working through the above items, you’ll want to ask yourself a few questions. These are some of the queries you might hear from potential investors, so you should be able to answer them succinctly.
- Why will you be successful? You should be able to answer this with concrete data. “This is the best idea, and no one else is doing it,” isn’t going to suffice.
- How much money do you need? It’s not good business to walk into an investor meeting simply asking for money. Tell them exactly how much you need. Whether it’s $10,000 or $1,000,000, you must know just how much you’ll need to take your startup to viability. If you don’t know the answer to this question, don’t go to your meeting just yet.
- When will you turn a profit? You must be able to make a realistic projection. Don’t overpromise – be conservative and have numbers to back it up.
- What are the incentives for investing? Will you provide partial ownership, decision-making power or just a monetary return?
- Do you have a financial planner? If your investors are throwing money your way, they want to know you have someone with experience to manage it.
Getting your startup off the ground requires not only a great idea, but a solid business plan complete with growth and financial projections.
Before you seek funding for your startup, you should be able to answer any questions potential investors might ask. You should also be able to present them with a long-range forecast of the benefits to them for investing in your startup.
A good relationship is important when seeking funding from investors, so be upfront and clear when seeking funding.
Are you a new startup? Are you looking to get your new business off the ground and watch it rise to success? We are here for you. We can help answer your questions and guide you through the process. Outsource your finances, payroll, HR duties and more to us. Contact Escalon today to get started.