Before you can raise any outside startup capital, you should know a few things. Primarily, you need to clearly understand what startup capital is and why you need it.
Startup capital is the money you need to get your business running. It can be used for everything from renting office space to hiring employees and buying inventory.
While it is possible to bootstrap your business and go without outside funding, there are better options than this. In most cases, you will need to raise at least some startup capital to give your business the best chance of success.
Keep reading to learn more about things to know before raising startup capital.
How Much Does a Startup Cost?
No matter how huge your future business will be, the initial step is figuring out how much money you’ll need to start it. To raise money, founders will need to understand how much money their company will need both on day one and day one hundred. This exercise will help entrepreneurs comprehend the financial reality of their new business. Being unfamiliar with your numbers is the simplest way to turn off a potential investor or bank loan officer.
There are various initial capital requirements for every firm. For example, an internet startup may not need the license, inventory, and insurance responsibilities a brick-and-store business does. It would help if you researched to estimate your company’s launch costs because most new business owners are unaware of all the specific transactions that make up a business.
To help you figure this out, you need to speak with an accountant or hire an industry consultant. They will dissect everything that goes into running the business and determine how much you need to jumpstart your business.
The costs may vary depending on the type of business, but generally, it includes the following:
- Website and app development
- Product development and prototype creation
- Internet advertising
- Paying for software as a service subscription
- Dropbox, Amazon Web Services, and alternatives from Greenfly are examples of cloud storage
- Outsourcing labor and expertise
- Legal costs
- Equipment
- Utilities
- Permits and licenses
- The workplace
- Salaries
You can start developing your first capital requirements and income predictions once you understand these costs. Create a worksheet and list each expense associated with your startup. Remember to use your own experience and skills to reduce these expenditures. Think about doing the promotion yourself or ask a helpful colleague to assist with the setup of a space.
Your Options for Raising Capital for your Startup
There is no one-size-fits-all approach to fundraising for your new business, even within the same industry. Instead, you must tailor your approach to your specific business and goals. Here are your options.
Bank Loans and Lines of Credit
Though they may seem the most obvious choice, bank loans and lines of credit are the hardest to secure, particularly if your tax records are less than two years.
The best option for debt financing is U.S. Small Business Administration (SBA) microloans, particularly for businesses operating for less than two years or do not have substantial tax records. These loans, which range in size from $5,000 to $50,000, are provided to assist new and growing enterprises. They can be obtained through accredited intermediaries and probably need some personal guarantees or collateral from the owner.
Friends, Family, or Angel Investors
Many founders rely on friends and family or angel investors for funding when they lack an established business history. This type of capital is often specific to each deal, providing more leeway with deal terms. You can raise debt capital or borrow money from one family member and receive investment from another, for example.
Angel investors are non-institutional investors who might be entrepreneurs themselves. They often have a strong interest in helping small businesses and startups, and they may invest in exchange for debt or equity. Growing your network can help you connect with individuals willing to invest without too much interference in your business. Search for local angel groups. They are like-minded individuals who pool resources to make a more sizeable investment.
Crowdfunding
Some startups are successful in launching their businesses thanks to crowdfunding websites. This method involves raising money online through various platforms, frequently in exchange for a “reward,” depending on the investment amount.
With no repayment or equity distribution requirement, creators can raise modest sums from a sizable number of people using the traditional crowdsourcing approach. However, a strong network of friends and family and some basic marketing is typically necessary for this sort of funding to be successful.
Incubators and Accelerators
Depending on your sector, pitching to accelerators or incubators may be a smart option. Early-stage companies may benefit from these program mentorship, management, marketing, and funding access. In addition, startups participate in one of these initiatives for a specific period and frequently collaborate with other recently emerging firms in their sector.
Since acceptance is frequently quite competitive, entrepreneurs may need to travel to attend educational sessions. It’s important to consider whether your company is a good fit because many are centered on growth-driven businesses.
Venture Capital
Once an idea has been commercialized, venture capital money is frequently used to advance a firm to the following level. Venture capital is designed to provide a firm with a quick infusion of cash to accelerate its growth. When a business has a good idea but may have few tangible assets that a bank may use as security for a loan, these funds can be helpful.
Venture capitalists frequently acquire a sizable equity share. They can be quite involved in the business’s operations because they are investing in a balance sheet with the hope of a successful exit in the future. VCs typically focus on a single industry and invest in sectors they believe have enormous growth potential.
Grants
Most grant money has strict conditions for distribution, contrary to the misconception held by many founders that grant money will be an accessible source of funding. Instead of going through the national SBA, looking for extremely localized chances offers the best possibility of receiving grant money; nevertheless, do extensive study on this choice before incorporating it into your plan.
Family Offices
Family offices are organizations rich families create to administer their assets and offer family members tax and estate planning services. It is between venture capitalists and angel investors and is frequently engaged in mission-driven investing. Funds from family offices have a variety of contract formats, although they frequently act more like angel investors than venture capitalists when they invest in a company.
Setting Yourself for Success
After you have identified your capital source for your startup, the next step is to prepare for your pitch. Here are some tips to help you secure your funding.
Know your financials
According to Erik Wright of New Horizon Home Buyers – As a founder, you must be completely knowledgeable about their finances. You should prepare a pro forma with at least three years’ worth of estimates, a balance sheet, and a cash-flow statement in addition to startup costs. Your predicted earnings before interest, tax, cost of goods sold (CoGs), amortization (EBITA), gross profit, and gross margin should also be able to be discussed. Although friends and family may not need as much financial detail, banks, VCs, and some angel investors will want a comprehensive understanding of the financials of their potential investment.
Have a strong business plan
What elements of a business plan should investors look for? It is important to understand this. It is only sometimes successful in inferring what another person is thinking. It is your company’s comprehensive road map and blueprints. It must contain a strong development and operations strategy, a market analysis and branding strategy, risk management, an investment offer, an exit strategy, and other crucial components required for your business to succeed.
Be precise about your competitive advantage and strategy.
How meticulously did you plan out your approach? It is crucial. Even if you are new to something, they expect you to consider everything carefully and to think like an expert because of thorough research. Many business plans need to explain their marketing and business plans completely. In turn, it demonstrates to investors that you have yet to consider crucial factors, and they will move on.
Include all the pertinent information about your company
Inform the investors if your project or company is now operational. You will gain more credibility as a result than startups. Investors will feel more at ease with projects and firms that have been functioning for a while because they know the industry’s risks, ups, and downs and have firsthand experience in it.
Having your business, or at least a portion of your activities, established is advantageous even if you have yet to make a profit. Projections and value can be made more precisely with an existing business than with a startup. Utilize that advantage to capture their interest and move on to the next round.
Be sure to include your management team.
Many people wouldn’t consider this as crucial as the business concept. However, many investors value this highly, particularly venture capitalists. Investors in venture capital pay close attention to the management team, their backgrounds, and their personalities.
Even some venture capitalists would admit that they have funded entrepreneurs rather than the original business concept because they had confidence in the entrepreneur’s ability to succeed. Including professionally formatted and carefully maintained CVs with business ideas is crucial. Pay attention to the role of human resources.
Know the investor to approach that fits your business’s long-term and short-term plan
It is crucial to know which investor to approach to increase your chances of success. You might not approach specific investors if your company can only be established in one location and has no scaling potential. In your business strategy, it is crucial to note if your project, technology, or enterprise is open to expansion into other markets, regions, or nations.
Many firms erroneously believe they are aware of their company’s value. Financial valuation is more complicated than one might imagine. A business valuation performed by a qualified third party gives your project legitimacy, comfort, and seriousness. It also gives your project or business the advantage of knowing your business valuation.
Know who your competitors are
According to Martin Seeley, CEO of MattressNextDay – The market research you do before entering another company’s market is crucial since the competitive landscape is constantly shifting.
In the past, many business owners have used this information to better understand their target market’s needs and desires before developing a distinctive solution. When there are so few competitors in each market that you can dominate, competition may be fine.
Competition might be a problem if you’re just getting started because it takes time and money to compete. However, as more businesses enter your industry, you might need to invest in fresh marketing strategies or create new features or services to survive.
Market research is crucial to raise startup money because it enables you to identify your advantages and disadvantages.
Hone your pitch
No matter your funding option, a powerful and appealing pitch is essential. A strong pitch deck, which should concisely explain your idea, background, prospective market share, and, in some situations, your exit strategy, is a fantastic place to start. Keep things simple and data-driven while looking for open-source templates.
Create and practice your two to ten-minute pitch about why your idea has market value using the information on your deck. Even while family members and loan officers might not want to listen to your pitch, they will undoubtedly want to be persuaded to entrust you with their money.
Conclusion
Before raising startup capital, it is important to clearly understand the several types of funding available and the associated risks and rewards. Venture capitalists typically invest in high-growth potential startups, but the downside is that they often require significant equity. Convertible notes and SAFEs are alternative financing options that may be more suitable for certain startups. For more information on raising startup capital, don’t hesitate to contact us.
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