What To Do Before Asking for Funds
“Business journeys are always arduous. Financials should be adequately accounted for and presented fairly and reasonably. With the figures in place, businesses can build credibility to interested parties when it comes to fundraising.” — Jeslin Bay, BlackStorm Consulting
When setting up a business for financial success, there are many things to think about. We’ll go over important things to think about when it comes to a startup fundraising in this short free article. So, what should you do before asking for funds?
✅ Item 01: Determine how much money you’ll need
How much money do you think you’ll need?
Sometimes, business owners neglect the importance of creating a well-thought-out budget. The advantage goes to those who know their numbers down to a tee. Although the figures may fluctuate, the time and effort it takes to determine your number will provide you with helpful information about the rest of the funding process.
How do you know how much money you need?
You can’t tell how much money a startup will need in the first few years, but it’s possible to make reliable estimates. If you have past records, start to look at your company’s past financials and use that as a benchmark to forecast. If you are a new startup, start by identifying the key revenue and expenses for the first 12 months and using that as a foundation to build on a three-year plan.
Next, look at the use of funds. Startups raise money for various reasons, and the most common one is to scale the business. Remember to strike a balance between Financing expenses and Investing expenses. You can’t have all your funds going towards financing costs. To avoid cash flow concerns, make sure you know how much your monthly burn rate is and retain a minimum of 3–6 months of cash reserves.
✅ Item 02: Choose a funding plan
What are your plans for getting the funds?
There is a growing number of options available to you when it comes to securing money. Think about your plan before you write your pitch deck because it will impact how you pitch for money. The following are the most common methods of startup funding:
1. Financing based on equity
Financing based on equity, also known as Equity Fundraising, refers to selling a part of your company to a partner who is an investor. For startups, look for angel investors who believe in you. Keep in mind that investors usually come in at different stages of funding.
As you scale your business, your investors’ profile will evolve from angel investors to a Venture Capital (VC) fund and Private Equity (PE) fund.
- No need to “payback” like some other methods.
- Able to tap into the investors’ non-monetary assets or values such as network or technology IP etc.
- Able to leverage investors’ reputation to enhance the company’s values and reputation.
- A possibility of losing control of the business.
- Must take investors’ exit strategies (such as M&As or IPOs) when scaling your business.
- Continuously management of the investors to have all parties having the same vision.
2. Financing based on revenue
Revenue-based financing is a way of raising capital where the repayment of the loan is tied to a percentage of the company’s revenue. The return amount is negotiated, and that amount is paid through a percentage of the company’s revenue until the initial capital amount, plus a multiple is repaid.
- Unlike a fixed-rate loan, if revenue is cut, your loan repayment is reduced as well. This feature can help businesses survive periods of low revenue.
- Usually, companies would need to have a history of a steady monthly revenue stream to obtain financing.
3. Debt Financing
In debt financing, individuals or institutions who provide the loan become creditors and receive a promise on the repayment of the principal and interest on the debt. Debt financing may involve secured (loans with collateral) or unsecured loans. A bank loan is a prominent source of debt financing for startups. This could take the form of a personal loan to the entrepreneur or a business loan to the entrepreneur’s company.
- The loan payback schedule and the amount owed are both predictable.
- Usually has a lower cost of capital than equity-based financing.
- Does not require entrepreneurs to transfer ownership of their company.
- Most early-stage startups will not receive traditional debt financing unless they can offer hard assets as collateral.
✅ Item 03: Preparation for a business pitch.
To attract proper investors, you’ll need a well-written pitch deck that they’ll study to see if you and your company are worthy of their investment. Knowing your numbers (see item 1) will speed up the process even if you merely fill out loan applications.
To get started, here are some of the fundraising collaterals you need to pitch to investors:
- One-Pager Summary: This is to give investors a clear idea of what you’ll be pitching about. To pique investor’s interest, it is recommended for your one-pager summary to be a 3-to-5-minute read and easy to understand. Note to include your “problem”, your “solution”, and how much and what kind of resources do you need.
- Business Proposal: This is to give investors a detailed and analysed plan of what your company is currently about and soon. You can include the problem you are solving, the solution and your competitive advantages, business model, financial summary, competitor analysis, your team, what you are looking for, what is the traction and impact, and the future of your company.
- Lite and Detailed Pitch Deck: You can use the lite one as a guide when the presenter is pitching, and the detailed one to convince investors to buy into your company. Again, you can include the things you included in your business proposal.
- Product Demo: This is to give investors a clear idea of how your product will work and be able to become a necessity in consumers’ lives. Note to include the problem you are solving, your solutions, and provide a sample or demo account if need to.
✅ Item 04: Demonstrate “Traction.”
Traction, in simple words, is evidence that someone wants your product. However, there is no universal definition of traction — ask five different people for explanations, and you might get five different answers. Traction is needed for fundraising collaterals (see item 3).
We categorise traction into two broad categories: quantity and quality. The following are the differences between the two modes of evaluation, as well as the subcategories found within each:
Growth measurements are important to investors. Revenue is, unsurprisingly, the most critical growth statistic. In other cases, founders can show further proof of growth indicators, such as:
- Retention. Can you convert customers into repeat customers and keep them from transferring to a competitor? This shows whether your product and service quality satisfy your current customers.
- NPS Scores. This is a metric that measures a company’s customer loyalty and their willingness to refer a company’s products or services to others.
- Viral Coefficient. This is the number of new consumers or customers generated by an existing satisfied customer.
- App Downloads, User Numbers, Visitor Numbers, Waiting List Sign-ups, Mailing List Subscribers are some other growth indicators.
Investors are also interested in the second type of traction: third-party validation. In other words, anyone who believes in your startup’s vision, product, or services should be highlighted. The following are the most widely used methods of validation:
- Media Attention. The words of media sources hold more weight than those of ordinary pitching.
- Approval from the public. Don’t downplay the influence of public approval. Participation in reputable accelerator programs, pitch competitions, and industry events can demonstrate qualitative traction.
- Outstanding Team Members. Most early-stage investors will tell you that they invest in people rather than ideas. This is not far from the truth.
- Social Proof. For better or worse, investors value the opinions of those with industry authority. Simple acts like posting on social media or getting your customers’ feedback could mean a lot.
- Advisors. If you’re just starting out as an entrepreneur with no contacts, we suggest getting advisors specialising in your industry. A respected name’s suggestion could mean the difference between a ‘yes’ and a ‘no’ from a skeptical investor.
Remember that your industry will determine traction indicators specific to your sector. A fashion firm, for example, could wish to emphasise user numbers as well as photo uploads, social media interactions, and pure user numbers.
The bottom line is to use all the facts to show that you are moving forward creatively and honestly. When illustrating traction, remember that graphics, charts, and visuals are your best friends.
✅ Item 05: Find out what the terms of the financing arrangement are.
Your lender or investor will undoubtedly suggest a financing deal with attractive terms and safeguard them. Here are some of the things to take note of when selecting whether to seek a particular financing method:
(1) What is the most convenient source of funding for the company?
(2) What is the cash flow of the company?
(3) How vital is it for the company’s owners to keep complete control?
If it’s equity fundraising, for example, you can consider the following:
- What are the various phases of fund release for equity fundraising?
- What is the extent of their veto rights?
- What is the nature of investor reporting?
If it’s loan/debt financing, take the following questions into account:
- Is the interest rate fixed, or does it fluctuate with the market?
- What are the various penalties that can be incurred if payment is not made on time?
- What are the additional costs if the company chooses to pay in full rather than monthly instalments?
- Capital Expenditure is not reflected in the P&L but impacts the cash flow of the company.
- Financing Expenses is used to fund the company’s operations, including debt, equity, and dividends. This increases the cash flow of the company but is not reflected in the P&L statement (e.g., issuance of stock, repayments of long-term debt, repayments of equity).
- Investing Expenses is used to purchase non-current assets (long-term assets) that will deliver value in the future. (e.g., sale of property & equipment, collection of principals on loans, purchase of investment securities).
Congratulations, now it’s time to make even more money with that fund! Like death and taxes, funding is almost essential for startup; therefore, it’s preferable to understand how to deal with it early on or hire pros to assist you. Following this, a startup finance checklist can help you feel less intimidated and concentrate on developing a successful firm.
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