30 Mar 2020, 14:39 — 22 min read
Startup funding is definitely a popular topic which is discussed in the world of startups today. A lot of entrepreneurs have asked me about Startup Funding. There seems to be a lot of myths surround the subject of startup funding. So I decided to create a three part video series along with the article to help aspiring entrepreneurs through the funding cycle. The first section and the video talks about the prerequisites of funding, followed by the sources of funding and the process of funding.
Gone are the days where you can get funded based on an idea. In order to secure funding you must establish the feasibility of your idea through proper planning and implementation. You must have a prototype or a minimum viable product. You should also establish the proof of concept of your business before you qualify for funding.
Apart from these reasons and leaving a very few special case exceptions, you would struggle to justify your funding need. Do not get funding because it is cool or it’s fashionable. Ensure that you create a strong foundation of the business before looking for funding. Seeking funds for wrong reasons is clearly a recipe for disaster.
In reality, investments can either be purely in one of these forms or may be structured as a combination of multiple forms. It is important to understand the funding structure stated in your term sheet and the advantages and disadvantages it may have for your business. For example, in case of royalties and debt investment you will have a regular cash outflow which might be a hindrance to the future growth. In case of equity, you must be prepared to give out a substantial portion of the equity over several phases of funding to the extent that you might not have the controlling share in your own company.
These were the options for initial setup.
As you can see the expected return for the investment gets lower as the business grows. This is primarily because the risk is reduced as the business matures. As the business grows bigger it becomes more stable and sustainable. So earlier you raise funding more equity you would need to shell out.
Let’s have a look at the investment ranges for different categories of investors. This chart will give you an indication of the quantum of funds invested by each category of equity investors. Please note these numbers are just an approximation and may vary case to case.
Before we dive into the process of funding, let us understand what do investors look for before investing. What are the investment criteria from the investors point of view that drives an investment?
What do investors look for in a startup
Before approaching investors for funding, you must prepare your pitch. The essential components of your pitch include a comprehensive business plan with projections of 5 years along with investment offering and estimated valuations.
Along with the business plan you must have a well-designed investor deck which is a presentation of around 15 to 25 slides summarizing the business plan. The investor presentation comes in handy when you present in front of the investors.
Your pitch also needs to have a well drafted executive summary also called teaser summary. This is a 2 pager document summarizing the overall business plan. Teaser documents are usually used to initiate a formal communication with the investors.
You should also prepare an elevator pitch which is a 5 minute verbal summary of your business idea and the plan. It is called an elevator pitch because you should be able to pitch to someone over an elevator ride. Elevator pitch comes in very handy to pitch to investors when you meet them in events or conferences.
You must spend adequate time and effort researching, creating and preparing the components of the pitch before approaching the investors.
If you need any professional help to create your business plan and pitch documents feel free to contact the team at BplanExperts.com. They have the experience of helping over 1600 startups across 80 countries. They will surely help you.
Once you have the pitch along with its components ready you should start approaching investors. You can meet investors in startup events or competitions. You can also proactively reach out to investors by sending them emails with the teaser document and follow up for a meeting. You can also reach out to investment forums or investment networks or get referrals from mentors.
The fund seeking process can be time consuming, difficult and challenging. You must understand that you will face a lot of rejection, but you will have to be relentless. Also ensure that you balance your time between fund seeking and running your business because without a running business there is no question of funding.
It’s is also very important that you understand the investor psychology.
Once you understand the psyche of the investors, you can optimize your pitch accordingly.
Now here are some of the things that investors won’t tell you.
So, with this we conclude the 3 part series of startup funding. Hope these videos and the article have helped you to get an overview of startup funding. If you need any help with your business planning and funding exercise feel free to contact the team at Bplan Experts.
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Posted byArnab Ray
Arnab is an entrepreneur, management consultant, mentor and an early stage investor, deeply involved in the startup ecosystem. Arnab is the CEO & Managing Director at Array...
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