The Ultimate Strategies To Raise Start-up Capital.
Not working a 9 to 5 job under a corporate entity; being the master of your destiny; transforming an idea into a million or billion dollars’ worth of business; aren’t all those part of the dream for so many? The rapidly booming global start-up ecosystem is the manifestation of these dreams, along with the hard work and perseverance of the dreamers. If you have an idea and are confident enough of turning that single idea into a successful business, then you can be a start-up owner too.
Think it’s impossible?! Look around, all the big companies, Apple, Facebook, and likewise, the stars of the corporate universe, they all were start-ups at one point. However, believing in your idea, or taking the decision to start a business, that’s hardly the difficult part. What’s the hardest is to get others to believe in that as passionately as you do. Getting investors to raise capital for your start-up business, now that’s the real challenge.
Raising capital is the key ingredient that makes your start-up recipe work. Without proper funding, your business won’t be able to survive the harsh business world. It might be fair in the beginning, but lack of funds is one of the primary reasons why most start-ups close shutters within a year or so.
This write-up puts all those things into perspective, walking you through the basics of gathering funds for your start-up; the different options that you have; the different stages of fundraising, etc.
What are the 3 stages of raising start-up capital?
Let’s start with the basic, which is the start-up funding stage, shall we! It’s not necessary that all fundraising before the initiation of the business. An entrepreneur might require funds at different phases of launching and building a start-up from the ground up. If one has to generalize then there are three phases of capital raising, junctures of your start-up timeline when you might require entities searching for startup investment opportunities.
- Pre-launch stage
- Post-launch stage
- Business Scaling stage
Each phase of a business is important for its growth, and the financial needs vary as well. In the pre-launch phase, a start-up needs money for:
- Product development
- Internal infrastructure building
- Personnel hiring
- Pre-launch marketing and promotions
Every business has its unique needs for funds, and it also varies in terms of industry and the target audience that it intends to cater to.
When raising money during the pre-launch phase, the founder of the start-up should keep a check on how and on what the capital is being spent. It is essential to check on the burn rate before the business starts to rake in some cash.
Overspending on unnecessary things like expensive office space, inventory, salaries, or other vanities, can cause start-ups to burn out their capital, even after raising a significant amount. It is best to stay frugal till you start earning significant profits.
Post-launch a start-up has to focus on revenue growth and sales boost. The usual capital expenses involve marketing and promotions, new product development, branding, operations expansion, infrastructure improvement, and likewise. In a scenario where a certain product doesn’t work out, and multiple of your post-launch decisions end up in a dud, there are lots to learn from the mistakes.
To pivot from those bad decisions you need more funds to move forward. In this stage, when acquiring funds, you need to make your investors believe that you have learned lessons from your mistake, and now you know the road to success for your brand.
This is an interesting juncture in the life-cycle of a start-up where the founder has finally found out the core element that would accelerate the growth of the business. It’s at this juncture that would require significant funding to put business ideas into action. Smart business owners wait till this stage to raise wholesome capital to turn the start-up into a money-making machine.
The other essential factor to consider when raising capital is defining the value of the business. Both the start-up team and the investors need to understand the position of the company within the industry and the market. Some start-ups are also known to raise money to determine their valuation. To summarize, one should wait for the right time to raise the capital for their start-up for the business to succeed.
How do you get funding for your start-up?
There are multiple avenues to seek funding for your start-up. Let’s explore the options, shall we!
When thinking of starting a business it is best if you have some saved-up funds that can be accessed easily. The other way to access funds is through friends and family. This is also known as self-financing a start-up. This is a common avenue for many looking for funding to start a business. It is easy to get the desired amount, and friends and family are usually more cooperative and flexible in terms of returning the loan.
- Easy access to the funds
- Flexible loan terms and interest rates
- Minimal bureaucratic hurdles
It works for small businesses not the ones with extensive infrastructure.
The next on our list is angle investment or angel investor. These angel investors for startups come loaded with a significant capital amount at their disposal, which they want to invest in lucrative business propositions. Angel investors might come in a group or individually to assess the business proposals of multiple candidates and then choose the most likely one.
- Besides capital, they also offer mentorship to the business founder.
- They don’t shy away from taking risks based on their faith in the potential to generate massive ROI from a business idea.
The investment capital might be lower than other funding avenues.
Crowdfunding is often referred to as startup investing platforms. This owes its popularity to the advent of digitization. A crowdfunding platform can be set up by start-up founders seeking funds. Using that interactive platform, they can pitch their business ideas and challenges to the investors, or people interested in their business proposal. The business model and growth potential are shared on the crowdfunding platform. If it generates enough interest among inventors, then they would pledge their support on the platform and donate funds.
- It creates a public interest and buzz surrounding your business which helps in marketing in promotions too.
- It can potentially attract venture capitalists to invest in your business.
It can be quite competitive, especially if multiple people are pitching similar ideas.
Read More: Riding on the trend of crowdfunding, this write-up explains how you can streamline the act of fundraising through an intuitive and user-friendly platform, both as an app or a website
Venture capital funds are investment firms on the lookout for businesses showcasing immense potential and prospects. They are more interested in capital funding a robust business structure instead of equity. If there is a business acquisition or an IPO it is easy for venture capitalists to pull out and look for other good start-up investment opportunities.
- VC investment monitors the growth of a company ensuring its sustainability for better ROI.
- These investors help the business with expertise and mentorship.
- They are often known to pull out after they have received all the profits from the investment, which can be 3-5 years.
- Since a large chunk of the business is taken over by venture capitalists, the founder might lose grip over the business.
- Venture capitalists usually invest in bigger companies with an already solid foundation and a certain level of stability.
As the term suggests these are financial incubators for businesses that are just starting and need funds to move forward with the same. These are organizations that help a business with finding and other support enabling them to get a market hold. Incubators foster businesses, while business accelerators help fast-track their growth and development.
- Your business will receive both funding and mentorship.
- You can build a network with other start-up heads.
- If there is a lack of commitment and motivation then your business growth might spiral downwards.
Other ways that you can raise capital for your start-up are:
- Get a business loan from banks and other financial institutions.
- Source working capital from banks.
- Raise the finds by winning start-up contests (Example: Shark Tank, MIT $100k, Start-up World Cup, U.Pitch, TechCrunch Disrupt, etc.).
- Get loans from microfinance providers.
- Government programs offering to fund to start-ups.
- Product pre-sale, business credit cards.
What do investors look for in a start-up?
So, now we know at what times a business might need funding and we know from where we might get the funding. Now, let’s do a quick review of what start-up investors look for in a business.
- A robust business plan that convinces them about the potential of the business. It also gives them a glimpse of your temperament; whether you are being too optimistic, or being realistic. Most would appreciate the latter.
- The product positioning in the market and if it has already launched then the response it is receiving.
- Investors like venture capitalists would assess the target market size. They expect sizeable returns against their investment, and hence, they do not invest in a company with a seemingly small target market.
- They would assess the MVP or Minimum Viable Product of the start-up. Hence, it is essential that before gathering investors you establish the minimum viability of the product that meets the current and scalable needs of the market.
- Investors look for unique yet practical business ideas that have the potential for traction. Keep your USP ready to attract investors.
- All investors want a significant return on their investment, so you need to have an exit strategy in the wraps. They would ask you about your strategy for fund utilization and other business moves and stats, along with a tentative exit timeline.
- Lastly, investors seek start-up founders with strong leadership skills.
Read More: Tech trends keep evolving and to ace your digitization game you need to keep up with the new. So, here are the top 10 mobile app development trends to pay attention to in 2022.
To summarize, raising capital for your start-up, hinges on the viability and uniqueness of your business idea, and how well you present it in front of the investors. Follow the basic playbook to launch your start-up and become a part of the global business ecosystem.