How and when to seek funding for your start-up

culled from:venturefund.com

Many aspiring entrepreneurs hit the ground running. They create a business plan, develop relationships with key staff and clients, and set up meetings with potential investors… only to be turned down flat. Where did they go wrong? They tried to get funding before their business was investment-ready. In today’s competitive market, funding is harder than ever to come by. Investors don’t invest because they believe in your dream. They don’t invest because they want to support you and help you on your way to success. They invest because they expect to earn a profit on their investment. They take a risk expecting a reasonable rate of return. Successful angle investors and venture capitalists are not in the business of funding other peoples’ dreams. They are in the business of making money. Seeking out seed money too early in the process, before your business has a chance to prove itself a risk worth taking, is simply asking for rejection, and may make it more difficult to obtain funding later on. Knowing when to ask for money from investors, and when not to, is an important skill you will need to hone if you want to succeed. Here is a list of steps to take before you ever approach an investor with your idea.  

Invest in yourself Before you can convince someone else to invest in your business, you need to prove your own commitment and your ability to succeed. Proof of concept simply means showing that your business idea is workable - proving that your business is a viable proposition. This may mean finding the means to get your company off the ground without investors, at least at first. Self-funding has two major advantages. First, if you are putting up your own capital, you have no one to answer to but yourself. If the business fails, you will have lost your investment, but you will not be left with an enormous debt that must be paid regardless of profit and loss. This freedom offers a great deal of flexibility. Secondly, you will be able to approach investors with not just a proposal but a working company with a proven track record. Even if you’re just starting out, proving that you have a viable market and that there is demand for your product or service, means a reduced risk for investors and a better chance they’ll make a good return on their investment, making your proposal much more attractive.

 Build a team Businesses are built on the skills and expertise of its founders and staff. Chances are you have a valuable skill or idea, but you may not have the experience of running a company, hiring the staff you need, assembling the manufacturing facilities and a myriad of other aspects that will make your venture run smoothly. Finding the right staff is more than a simple matter of hiring a good accountant and lining up reliable workers. You may need to bring in experts in the industry as part of your team, to create a successful company with a well-rounded base of knowledge and skills. A small business can benefit from bringing on one or more highly skilled people. While expertise is expensive, it may be possible to obtain these skills by sweetening your offering. Consider making one or two key people non-executive directors, team leaders who get involved with the strategy and nuts-and-bolts of the business while allowing you to retain the freedom of autonomy as founder and owner.

 Keep a close eye on your bottom line When you are paying the bills, chances are you’ll be more careful with spending. Running out of cash is one of the fastest routes to business failure. Growing too fast, overspending or overextending can cause your business to fail. Proceed with caution and self-control with your company’s budget, and you will enjoy long-term success. Change is the name of the game You created a business plan, and you have laid the foundations for success. Things seem to be going along just fine, until you hit that inevitable bump in the road. Now you have a choice: Keep going in the same direction, or turn aside and try another path. If your strategy is not working, you need to take a step back, analyse what’s going wrong, and decide how to fix it. Stubbornly staying the course with the belief that things will come right if you just keep doing the same thing is business suicide. Remember, the definition of insanity is doing the same thing repeatedly, expecting different results. Without change, there is no growth, no movement, and no life. Without change, your company is dead in the water. Be prepared to change direction when need be, to avoid stalling.  

Focus Founders are, in general, very creative people. That is why they are in business in the first place - because they’ve come up with a brilliant idea and want to share it with the world. Developing an idea means coming up with accessories and extended services that enhance the original product. Growth depends on coming up with new ideas and new ways to serve your customers. However, it is essential to remain focused on the original product. If you are so busy creating new accessories, that you don’t have the time to address a flaw that develops or a recurring concern customers express, chances are you’ll fail pretty quickly. Come up with a product development plan that improves the existing product and expands your offering, but do not forget your core product, or your core customer base.  

Know your bottom line One of the biggest mistakes many fledgling entrepreneurs make is in estimating - they either overestimate their forecasted profits or underestimate the costs of doing business. The result is disappointment when they run into some depressingly common scenarios. They have to let staff go, beg investors to give them money to prop up their floundering company, or give up the fight and go out of business entirely. None of those options are appealing, so lay a solid foundation by planning ahead. By starting out with a realistic plan, you’ll increase your chances of building a viable business. Why sabotage yourself with inaccurate or overblown projections?

 Know what you actually need When you’ve created a working business with an established customer base and the beginnings of a healthy profit margin, it’s time to begin thinking of growth and expansion. Now you have a working business with a proven track record, it is time to consider seeking out capital to fuel expansion. You represent a much better investment risk than when you were an unknown entrepreneur with a gleam in your eye and business plan in hand, but no working model. Remember to stay lean. Do not raise more cash than you actually need - remember that loans cost money and venture capitalists usually gain shares in your company as part of your repayment plan. Why pay out more in interest than necessary? Forecast your needs realistically.

 Now that you’re ready to meet investors... Prepare to go forth and meet success! Business is all about relationships. Networking is not just a marketing buzzword; it’s an essential tool in the entrepreneur’s belt. Customers don’t just buy your product, they buy you. The same applies to investors. Convincing investors to pour their hard-earned money into your company means convincing them to trust you, to provide a return on their investment. You are not just selling your business, you’re selling yourself. Creating the relationships that will give you the capital you need takes time, but with some determination and know-how, you can convince investors to join with you in your quest for success. Once you have established a working business with a proven track record and the potential for growth, you’re ready to begin seeking out investors. Congratulations, you have arrived. Now, here are ten tips to get you started on the next stage of your journey:  

1. Go where the money is Chances are, you have a comfortable circle of friends who believe in your business and are applauding your success. The natural instinct is to stick close to these people. Remember that your friends are also resources. Those closest to you have probably already done all they can to support you. In order to gain more support, you’re going to have to move outside your comfort zone. You will need to seek out investors who don’t necessarily know you, but who you can convince to invest based on your established track record.

 2. Network Don’t be so involved in the day to day operations of your company that you neglect this important step. Be aware of the people you are interacting with and make an effort to meet those you would like to do business with now, and in the future.

 3. Event planning Nearly every industry has conferences, conventions, meetings and social media. Stay connected. Attend some key conferences. Get to know who the movers and shakers are in your industry, and more importantly, be sure they get to know you.

 4. Give back As you develop more experience and establish yourself as a success in your niche, offer classes or seminars, or offer to speak at a conference. By teaching others, you establish yourself as an expert in the industry.

 5. Be confident When discussing your business, whether with competitors, peers, clients or customers, be sure to make positive statements. Do not offer impossible promises, but do make bold statements about what you can do for your potential customers, and then follow through.

 6. Ask to receive Not on the invite list for an exclusive industry event where you could meet potential investors? Pick up the phone. Call the sponsors and politely request an invitation. Be humble but confident. What do you have to lose? The worst they can say is “no”.

 7. Be sincere Never underestimate the power of the “little guy”. You never know who the next up-and-comer will be. Treat everyone you meet with the same sincerity and respect you hope to receive.  

8. Stand tall Even if you don’t feel confident walking into a room, keep your chin up, walk tall and smile. A tip for group gatherings where you don’t know anyone - take a moment to survey the room. Choose a small group of four or five people who appear to be chatting casually. Walk up and introduce yourself. Tell them you don’t know anyone here, and ask if they’d mind if you joined them. Chances are they will say certainly, of course, and someone will ask a question. Before long, you will be chatting away with your new friends.

 9. Expect interest Never leave home without a bundle of business cards tucked into your pocket. Have a brief statement about your company, a 10-20 second summary of who you are and what you do, rehearsed to share with people who ask about your business.


 10. Remain optimistic Go in with reasonable expectations, and chances are you will not be disappointed. At very least, you will meet some new people. With any luck, some of them will be the partners you need to grow your business to the next stage of success.