The business that you started off with a couple of like-minded friends in your backyard looks promising and about to take off. Your self-funded resource pool has covered all your expenses for the past 6-8 months. Optimistically speaking, the funds could last you another 3-4 month. But what does one do after that? Product development and marketing costs are unavoidable. And the business needs money to get off the ground, grow and survive in order to make your dream a reality. At this point, one has to consider raising funds through investments. What are your options?
Where Do You Get the Funds from?
Sooner or later, most small businesses and startups look for funding and find investors. However, before seeking any external funding, it is advisable to make sure that your ideas and outlook match with those of your investor. Let us look at some of the funding options available to you as a small enterprise.
Many entrepreneurs start off by relying on their own savings, receiving loans or credit or seek financial support from friends or family. Bootstrapping is basically choosing to raise money within your own network without any help from external investors. While the funds raised this way can be quite modest, the upside of that is you, the entrepreneur can continue to have complete control over all aspects of the business.
In most other ways of fundraising, the investors will take an equity stake in your company in exchange for the financing the business.
This is a group of investors, who put in their own finance into the growth of a small business at an early stage. They might also potentially contribute to your business through their advice and business experience. They invest in your venture in return for equity. They could be just interested in seed funding or even a larger amount if they see the right opportunity.
If you are fundraising for your enterprise, this is a promising choice. Try to look out for Angel investors who have already made some money through their prior investments and hope to fund your business by offering funding and insights. Their belief and passion for your product/enterprise and the contacts and connections that they bring along can help you going forward.
This is an important source of funding for start-ups and other companies that are relatively new and don’t have access to capital markets. A VC firm typically looks for new and small businesses with a long term growth potential. Capital is invested in exchange for an equity stake in the business rather than given as a loan. These are professional investors and they usually deal with large amounts of money.
VCs will not be interested if the scale of your business is small even if it is successful. They like a firm with a vision to build something big and disruptive and new. Also, they often demand board positions to be able to actively participate in the company’s decision making process. They are looking at your financial and other management skills and will not be interested if you have run out of money and need them for survival.
The practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the internet is called crowdfunding. Such funding has been able to bring numerous investors and entrepreneurs together, even though they might be geographically far removed. No investment is too small and pitching in allows the investor to be part of the business.
Online Crowdfunding services are bringing new things into the world and as a small ecommerce entrepreneur, this is a smart option for you to tap on. It basically provides a forum to anyone with an idea to pitch in front of waiting investors. It allows you to post your business plans on one of the sites covering your industry and highlight the value your product/ idea is bringing to the industry.
It might just strike a chord with an investor in waiting and there! You may have found the investments that you have been seeking. If your product is solving a real problem and you illustrate thinking outside the box, you greatly increase your chances of successful crowdfunding.
The popularity of cloud fundraising platforms is on the rise as your location ceases to be a limiting factor to securing investments. AngelList and CircleUp in US, FundedHere in Singapore and ImpactGuru in India are just a few popular names in this field.
To understand crowdfunding extensively, read more: Have you Considered Crowdfunding?
Startup Incubators and Accelerators
This is another option you have. These startup incubators and accelerators offer seed money, expert mentorship, supplies and office space in exchange for a share of company ownership. The accelerator can also lend their network and provide mentorship opportunities and help you to snag future investments.
What Can You Do to Get the Investors Interested?
Pitch effortlessly to potential investors for a startup about the overview of your business, the problems it solves and what you need to make it better. And this is where the investor comes in……
Strategically position your business and growth plans in a way that makes sense and appeals to investors. Make sure that you point out the magic in your business – something that makes it special and mentions it right at the start!
Investors will need clear indications on how much money you seek to raise. What is the growth strategy and how much will that growth cost? Future spends on marketing and updating technology and even recruitment plans are also likely to be assessed. So have those figures ready! Create a realistic budget to create traction among investors.
It is much easier to get funding once you have some real paying customers. This basically works like a proof that the business-market match exists. This appeals to investors as it means you are a company with a proven traction and customer discovery.
Having co-founders with a range of skills and track record also gives more confidence to the VC or Angel investor as they are investing not only on your product but on your team.
Be Mindful and Choose the Right Investor
The investor engages in many rounds of meetings and interviews to make sure that he is backing the right project. Similarly, as an entrepreneur, it very important for you to get the right investor to back your dream project.
Get to know potential investors by researching their past investments. Do you have a similar business philosophy and ideals? It is important to be able to find investors with interests and beliefs that match yours.
The investors should be curious and have thoughtful questions that are indicative of their interest in the business. There needs to be open communication between the parties. And more importantly, make sure that the investors see your strengths and share your beliefs.
When you are starting off, it is always wiser to choose small and lesser-known investors who are likely to support your type of business.
It is smart to look out for strategic partnerships for advice and building relationships. This can result in a willingness to invest in the business later on. Being able to find an investor who can add something tangible (through advice or industry connections and knowledge) than just money and make your business stronger is surely a plus.
This is a wonderful time for entrepreneurship. Thanks to social media, crowdfunding and the relative affordability of technology, the barriers to entry have eased considerably and survival rates for startups have improved. All you need is to stay positive and believe in yourself and your business to make it flourish. Keep working on your dreams and bring value to people’s lives. Investors are always scouting for the right opportunities – just show them that yours is the one!