Startup Funding: Why Should Investors Invest in Your Startup?
Startup funding is a gamble for any investor. A venture capitalist might offer funding to 10 companies with the hope of making money on one. However, VCs will still evaluate your business very closely before making a decision, and so too will an angel. They will not just throw money into the air for the first firm to catch it.
There are things that you can do to maximize the chances of you being offered startup funding. It’s amazing how many startup founders ignore these factors when requesting cash. Here are some of the important points that you should consider and address before seeking startup cash from any source.
1. You Must Have a Viable Product
Do not ask for funding for an idea. You must have a product, and preferably be able to demonstrate a working model or prototype. You must be able to show that it works as it should do. In these days of 3D printing, it is generally easier to create working models than it was before. Even better would be if you already had one or two customers that use it.
Also, the product must be viable. A device for converting old Super 8 home movies to VHS format will not attract many customers. In any case, you wouldn’t be the first – so forget it. Your product must fill a chink in the market. If you do not have something new and unique to offer then you will not get startup funds.
2. There Must be Interest in Your Product
Have you sold anything yet? That’s one of the first questions you will be asked. What work have you done to get it off the ground? How much of your own money have you invested already? Have you tried croudfunding or Kickstarter? Is this your first startup or have you done this before?
Any investor will want to see some evidence that you are capable of success. Initially they will invest in you because their money will be responsible for getting your company off the ground and into real markets – not just sympathetic friends and relatives.
3. Will It Sell – Are You Capable of Selling It?
Is there any evidence of sales, or even of efforts that you have made to sell your product? Have you some preorders on the books or any other evidence that at least some people are interested in what you are offering? If you cannot prove that people are interested in your startup, why should an investor be interested in giving you money?
4. Are You Aware of Business Costs?
An investor will want to know how much your startup will cost to get it off the ground. You must at least know what the production costs are if you are selling a tangible product. How do such costs vary with volume? What would promotional costs be, and how would you promote it – with a launch event or just advertise it on eBay?
You must display a good understanding of business, production and advertising costs. You should also be aware of what essential staff you will require and whether you intend paying them a salary or some other form or regular income.
5. Does Your Team Have Enough Experience
Is your team sufficiently experienced to handle a startup and do they work well together as a team? Are they suitably qualified in each discipline: technical, business, accountancy, legal matters, etc? They need not be official team members, but they must be available to you. If your team does not have the experience to follow a business plan, meet deadlines, handle customers, sell product and make sure objectives are attained, then don’t bother asking for funding. You won’t get it
6. Have a Business Plan
You must have a business plan. This should include an objective, and how you intend to reach that. A plan for the first two years should be sufficient, because by then your business should be well on its way. How much do you expect sell and how do you intend to sell it. Where do you expect to be in two years time? It needn’t be too detailed, must show your vision and what your thoughts are about your future. You should explain how you will leverage your team’s experience and show how you will go to market with a cost effective strategy.
7. You are Not Far Enough Along
If you do not have a product in hand, if you have not sold anything and if you cannot even begin without capital investment then you are not far enough along the startup road yet. A startup should have at least sold some working product and have stirred some interest, even if only in the local community. A startup is not an idea waiting for cash to put into practice – you do that with your own cash, not somebody else’s.
Too many people are over-cautious, as though they are afraid to test the market with their idea. It’s OK to launch Version 1 and then make changes as you learn. Investors want as quick a return as they can get, and they won’t get that if you keep delaying while striving for perfection. There’s no such thing – why do you think most apps have several version releases!
8. How Much Do You Value Your Business
How much value do you currently place on your startup? Whatever it is it will likely be far too much. Most startups are worth only about a tenth of what their owners believe them to be. You can only put a genuine value on a startup if you have had past successes and if the business has good potential. An investor will need a lot of persuading that yours is worth anything at all if you have no track record and no idea how much you will be able to sell.
9. Know Your Competition
Never claim to have no competition – that will put investors off right away! Every business has competition of one kind or another. Your competition might not have the same solution as you have, but they will have one. It might be a unique approach you have not thought of, or simply an alternative route to the same end. Know and understand your competition, and be ready to explain why you can succeed in spite of them.
10. Anticipate Problems: Assess Risks
Carry out a risk assessment and figure out solutions to potential problems before they arise. A potential investor will want proof that you can react positively should things go wrong. What plan ever ran smoothly? Do you have the facility to ramp up production should orders increase, or do you have a backup plan in the event of manufacturing issues? Can your technology adapt to change, and how about cash flow?
Can you react if you get paid a month after you must pay your suppliers? It’s OK selling a product for $1,000 with $300 profit, but not if you have to pay your supplier $500 in 30 days and your client pays you in 60 days. You might secure business by offering attractive credit terms, but that only works if you have the cash flow to finance it. Capital venture funding could provide that cash, enabling you to attract more clients and grow the business.
Fundamentally, investors are looking for a startup with a good product that is in demand, has sold a few items and has been well received by customers. It should have development potential and a growing market, with a team capable of leveraging that market and handling an increase in business.
There should be a properly constructed business plan with future targets and objectives for unit sales and revenue, and investors should have confidence in the ability of you and your team of growing the business. There should be evidence that you are aware of any competition, and that you have properly researched that and understand how you are going to succeed over them.
If you are unsure how to construct a proposal for funding then find somebody to help you. The basic framework can be summarized as:
- Identify an unsolved problem or gap in the market creating a market opportunity.
- Provide an analysis of the potential size of this market.
- State your solution in simple terms and how you will provide it. How much will clients or customers be prepared to pay for your solution to their problem? Include details of sales already made.
- How will you advertise and promote your product to attract customers.
- State how you intend selling the product (or service): e.g. online, direct sales or through partnerships. Outline any marketing partnerships you have already formed.
- Carry out a competitive analysis, and how your solution is better than others already on the market.
- Provide details of your go-to-market strategy including pricing.
- Carry out a risk analysis – predict your major risks and any actions you have taken to prevent them or to mitigate their effects
- Offer details of your team members including their particular strengths within the company.
- Provide details of any successes to date, and results of any field trials and sales already made. Investors will be particularly interested in how far down the road you are with regard to establishing a product in the market and the way it has been received.
- Set out milestones stating where you intend to be over specified time scales; sales, revenue and projected profit.
- Detail how much money you need to reach each milestone and how it will be spent. You will likely be asked how much salary you intend paying your team and yourself.
In addition to including all of this information in your business plan, you should draw up a 2-3 page summary for your potential investors. They may make their decision based only on this summary.
Investors must be confident that they are not throwing their money away, and that your business has a good chance of succeeding. If you can persuade them of that, then you are in. Take a good look at your business from the outside and decide if you would invest in it. If you are not 100% certain, then you are not ready yet. It’s better to get it right and succeed than go too early and fail.