Ali Hasan
So you think that you’re the next big thing in entrepreneurship? If yes, then you probably might want to start your own business and change the world with your own revolutionary idea. But you’re unable to start the business due to lack of funds.
If this is the case, then you can raise some funding from those investors that are willing to fund you. But there’s a catch. Although it looks quite easy and glamorous to raise millions of dollars from the investors, in reality it’s a lot harder.
Raising funds from the investors requires you have a few things such as:-
- An idea
- A minimum viable product (MVP) or a prototype
- Some results to prove that you can stay in the market
- Proper analysis that contains all the relevant information given to the investors
Raising funds from investors is neither too difficult nor too easy. You just have to match the right timing with the right investors. For example – there are big VC firms that don’t facilitate investments that are below $30 million. Hence, if you go to them in the beginning and ask for $100,000, they won’t entertain you in any given way.
Same is the case with an angel investor. If you go to an angle investor and ask for $30 million, he won’t give you such a big amount because they facilitate smaller amounts ranging from $100,000 to $5 million. The figures are just estimates and will vary in reality from investor to investor.
You can raise funding from various sources and of various amounts, but it’s important to get the right investor and the right amount so that you can finally start your business. But before you venture out to get the funds for your startup, you need to take a step back and ask some questions to yourself just to get some clarity.
Most people assume that they need funds when they either don’t need funds or could arrange them from themselves. Before you approach investors, you need to be sure about all the pros and cons that come with having investors. It seems awesome from the outside but it has some serious consequences if you haven’t thought about the ins and outs of having investors.
Before you approach investors, you need to ask these questions in order to get some clarity. These questions are as follows:-
1. Do you actually need Funding – Most entrepreneurs assume that they need funding when they can bootstrap their business and can run their business for a couple of more months. If you have some resources, then it’s better to bootstrap your business and run your business for as long as possible.
But what the hell is bootstrap? Bootstrapping your business means to run your business with the least amount of resources for as long as possible. This means that you focus only on essentials and skip everything else that’s non-essential.
This means that anything that doesn’t contribute to the progress of the business is dropped immediately and only those things are continued which have an immediate effect on the business. Bootstrapping is a good technique that is used by many entrepreneurs who want to make it big in the startup world.
It has more advantages than you think. The number 1 advantage is that you learn to run a business without a lot of money. If you get successful this way, the same knowledge can be used when you have a lot of money. If you’re able to pull off now, then you’ll also be able to pull off later on.
It teaches you to work with whatever you have and you’ll learn effective utilization of resources. Another major advantage is that the more you’re able to carry on without external funding, the more easily you’ll attract investors.
When your business is already up and running and you have invested a lot of your money into the business, investors are very likely to invest because you have proven that you’re willing to work hard.
You can arrange the money by using your savings or you could ask for money from your family and friends. If you can arrange some money to start a business, then you might be the next big thing.
2. How will you use the money – Let’s say an investor agrees to give you some money and he asks you how will you use the money? What are you going to reply?
- Will you hire more people?
- Will you spend on marketing?
- Will you buy better technology?
- Will you invest in R&D?
As entrepreneurs, we all fascinate at the idea of having access to million in funding but do you have any idea about how will you utilize the funds? If an investor asks you and you don’t have a valid answer, then it might turn him off and he might decide to withdraw from funding you.
Hence, think and decide carefully about where you will invest the money if the funding is granted to you.
3. What is an ideal investor – You also need to think about what an ideal investor will look like. Investors are smart people and they have made their calculations before investing in your business and if you’re not smart about it, then they can control your business decisions.
Hence, think about what type of an investor do you want? Do you want a passive investor who gives you the money and then doesn’t bother you much? Or, do you want an active investor who gives his advice and guides you throughout your journey.
An active investor might also help you with his contacts and connections. Before you want an investor, think about what kind of investor do you want?
4. How much control do you want – Control is an important thing and as an entrepreneur you definitely want to control your business. Hence, before taking funding from investors you need to think about as you not only liquidate your equity but also your control.
If your investors don’t agree with you on various aspects of your business, then you’ll have a hard time running your business. Remember Steve Jobs, he was ousted from Apple because the investors didn’t agree with him on the future of Apple.
5. Have you done enough Research – Before you ask investors for funding, have you done research regarding every aspect of your business? Investors are quite smart and will enquire about everything before lending you the money.
If an investor asks you about something and you aren’t able to answer a question or you were wrong about a certain thing, then you won’t have a very good impression on the investor. Hence, do your proper research before approaching an investor.
You might think that your business idea is perfect when you might have missed something important about your industry.
6. What is your USP – This is one of the most common question investors asks to business owners. Why is your business different and unique than your competitors? If you don’t have a good answer, then chances are that you might not get funding.
Having a competitive advantage, differentiating factor or a Unique selling proposition is needed to maintain an edge over your competitors. Think about why your business can perform better than others in the market.
Then approach investors for funding. This way you have much better chances of securing funding while having a successful business model.
7. Have you done the math – Do you know how much money you want? Do you know what will be the returns? Do you know when you’ll hit the break-even point? What revenue and profits can the investors expect from you? When will they have a chance of getting an exit?
What amount do you want to raise? How much equity do you want to give to them in exchange of the funding? Many times investors want a lot of equity in exchange of the funding.
Hence, you need to figure out each and everything before you approach an investor. Make sure that you have done the math.
8. Will you sell your business – Most entrepreneurs sell their business to another corporation and cash out after a few years, thus making huge profits for themselves as well as their investors. You need to ask yourself whether you’re building your startup for selling to a bigger fish or you want to build the next trillion dollar company.
Whatever you decide will have a major impact on your investors as, if you don’t file for an IPO or sell your business then the investors won’t have a chance to have an exit. On the other hand, if you sell your business after a few years, then the investors can cash out and enjoy their profits.
Hence, decide in advance what you want to do with your startup.
9. Accountability & Pressure – While funding has its own advantages, it also comes with its consequences. When you accept funding from investors, you’re under enormous pressure to deliver on the promise of making your startup successful.
If you fail, then the investors will lose money and this would be bad news for everyone. Most people become entrepreneurs because they want to be their own boss but as soon as you accept funding from investors, then you’re accountable to those investors and you have to report them about the happenings of your startup.
Before you ask for funding, ask yourself whether you’re okay with being accountable to someone or not? Whether you would be able to handle the pressure that comes along with funding?
10. What will you do without funding – Just imagine for a while that you never received funding. How will you start your business if you didn’t have access to any funding? An investor can ask you this question and you must have an answer.
If you have figured out the answer to this question, then it will not only impress the investors but also help you in the long run while you’re running your business. It’s completely normal to look for funding but take a step back and think for a while what would you had done without funding?
Maybe answering this question can help in ways that you never imagined.
Funding is now Simplified
When you have answered each of these questions, then it’s time for funding from the investors. Hope you like our content. In the next blog we will cover who are the investors that can provide you with funding. So stay tuned with startuptrak.
