It takes money to get your business off the ground, and you may be confused about how to go about getting it. Here’s what you need to know to get the funding to start and grow your new company.
Know What Kind Of Funding You Need
Venture capital isn’t for everyone, even if the press makes it seem so. Venture capitalists (VCs) work at VC firms that invest other people’s or fund’s money (which they hold in a fund) into companies. VCs expect to get a profit when the company reaches an exit, usually by way of an IPO, sale or acquisition. Angel investors are high-net-worth individuals (or groups of individuals) who invest their own money and can also offer guidance in exchange for equity in the company.
You can also ask family and friends for initial funding, often referred to as a friends-and-family round. While personal relations are likely to trust in your abilities, it may strain your relationships. You can also go to a bank for a loan or apply for grants.
Later-stage companies that require at least $1 million may turn to private equity firms for a capital infusion. Private equity firms make investments to reap favorable returns for their shareholder clients, typically over a span of four and seven years, at which time they will seek an exit for an exponential return.
Startups may also want to consider joining startup accelerators such as Y Combinator or Tech Stars, which work closely with the startups they invest capital in as well as business assistance, office space and introductions for a few months in exchange for equity. Accelerators help develop your pitch and product and prepare for Demo Day in front of a targeted, invited audience.
Some startups choose to go the crowdfunding route through platforms such as Indiegogo and GoFundMe. These platforms have fees and rules relating to how much the user can raise and what happens to the money if the goal is not reached. These typically require resourcefulness on the company’s part to market the event.
Have Your Financials Prepared And Do Them Yourself
I can’t stress this enough. Doing your own past and pro forma financials will ensure you understand your business. In meetings, you won’t need to hunt through papers; you will know the information. I often encounter startups that don’t do their own financials and are ill-prepared to speak with potential investors. If you are not a finance expert, create something simple or use a standard template that covers such topics as revenue in and from what sources, expenses out and generalized categories. Know your net profit, when it will happen and how it will grow. This illustrates the story of your business and helps show how much runway you have, how much financing you really need and how long it will last. This will help you truly understand your business.
Investors are placing their money and trust in people. You need to be able to fully explain who your team is, why you selected them, their roles, responsibilities, equity and shared vision for the company. Investors need to be convinced that everyone knows what they are doing and are fully committed to the success of the operation. Differences of opinion are okay, but have a shared general vision and order of operations. Know each other’s expectations of workflow, office hours, time off and responsibilities. Be able to articulate this well.
Deck And Pitch
Often, good companies focus all their attention on their business and not on the deck. Overall, this is a good thing. However, prospective investors use the deck to gain insight into your business plan.
First, start with your elevator pitch, or the short explanation of what you are doing on a high level. State the problem your business will solve, how you will solve it and how big of a market there is for that solution. If you cannot succinctly explain what your company does, no one will understand or be interested in learning more. It wins the opportunity to present your deck, a 10-20 slide PowerPoint document that contains text and visuals and is the focal point of the meeting. When presenting, be prepared to go off-script and answer your audience’s questions. Do not feel bad if you don’t get through the deck; you will leave or send a copy to the potential investors. It is more important that you focus on their questions.
How To Answer Investor Questions
Be prepared for questions. Rehearse. Don’t get defensive. When you get defensive, the meeting is over. Don’t talk at people. Listen. Take in any feedback. Answer questions concisely and wait for follow-up questions. If you elaborate too much on one question, you may miss the opportunity to answer them all.
Be prepared to answer questions such as:
• Why did you start this business?
• What do you want to achieve?
• Why are you the person to do this?
• What are your revenue targets?
• When do you expect to be profitable?
• How much more revenue or what milestones will you hit from this investment?
It’s Just As Rewarding As Giving Birth
This company is your baby. You will have to go through labor pains to launch it and, once launched, you will need to help it to grow. Birth is just the beginning. Growing a company takes years, and having the right partners is crucial. Make sure to have a list of questions for your prospective investors as well to see if they are a good fit for your business. Some investors are very involved and some are hands-off, so make sure to clarify expectations and have good communication so you can grow the business together.