It takes money to make money. But how do you get startup funds to get your business off the ground? How do you fund your expansion into new products or increase market reach? External funds provide outsiders the opportunity to invest cash in your company in exchange for equity, or partial ownership of that business.
But finding investors may be easier said than done. Many startups are competing for the same pool of funds. Luckily, ambitious entrepreneurs can gain an advantage over their competitors by applying a few basic principles.
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Investor funding rounds
Before diving into your search for funding, it helps to understand the common stages, or funding rounds, that a startup typically goes through. Although not every company goes through every round, this overview provides a useful framework that can be applied to any business.
- Seed Funding: The Idea Stage
Seed money is typically provided by those willing to take higher risks than traditional investors, such as family, friends or angel investors. They are willing to invest in a startup with little to no track record in exchange for an equity stake in the company.
The goal of seed money is to pay for the initial costs of getting the business off the ground, including the purchase of equipment, acquiring building space, market research, etc.
Although some startups only need seed funding to get their businesses off the ground, many will need additional funding to expand their user base or optimize their product offerings.
- Series A: The Long Haul
A company will typically enter Series A funding after they have a proven track record. Series A investors will want to see how the startup used its seed money to execute a successful and viable business. They also typically want to know how the business plans to use Series A funds to achieve long term goals.
- Series B: The Expansion
A company that has gone through seed and Series A funding has established a long-term plan, developed a substantial user base, and is ready to expand. Series B funding is used to grow the company so that it can expand its customer reach while meeting higher levels of demand.
- Series C: The Domination
Businesses that have successfully reached their expansion targets using Series B funding may look for additional funding to help them develop new products, expand into new markets, or even to acquire other companies.
Six fundamental steps to procuring funding
With this model of funding rounds in mind, let’s dive into some tips on how to get started on the right path.
- Pitch deck
Any entrepreneur looking for funding needs to describe his or her idea in such a way that someone trusts him or her to the point that they’re willing to leave a substantial amount of money in his or her care.
This is where your pitch deck comes in.
The pitch deck is a presentation that entrepreneurs put together when seeking a round of financing from investors. Your pitch deck, usually presented in PowerPoint, should convince the investor that there is a problem that your idea solves, how you intend to solve it, the backstory of your idea and, most importantly, why your solution will make money.
- Financial details
Once you have gotten your potential investor’s attention with the pitch deck, you have to back up your claim with hard numbers. This means determining your company’s valuation in order to work out reliable projections and forecasts. Without the initial financial details, most investors will walk away.
- Business plan
Your business plan is further proof that your idea is financially viable. A good business plan will include a quick but thorough executive summary, along with the mission statement and goal of your company.
This is followed by the details of your expenses, revenue (current, projected or both), assets and liabilities and any other aspect of your finances. The more detailed, organized and transparent your business plan is, the more your investor will trust that you are financially responsible and that you will know how to use their money wisely.
- Due diligence
Nothing impresses an investor more than going above and beyond. A good entrepreneur should take into account any other factors beyond the financial details and business plan to answer any potential questions an investor might have, questions like the following:
- Who are your suppliers and what agreements do you have with them?
- What loans, if any, are you planning to take out?
- How is your organization broken out?
For a full list of what to prepare, read this comprehensive due diligence checklist provided by VC-list.
- Marketing information
Who are your customers? How do you plan to reach your target audience? Is there any specific niche that your business plans to fill?
It doesn’t matter how well built and organized your business or product is if there is no one to buy it. While you may need to secure some initial seed funding in order to pay for robust market research, having a basic idea of your target customer at the outset is important.
- Exit strategy
It may sound counterintuitive to tell your investors how you plan to leave your own idea, but an exit strategy tells them that you have a long-term plan for your business with a finish line in mind. It helps them understand just what they are getting into.
Is your goal to build your business up in order to sell? Do you envision merging with another company? Nothing lasts forever, so giving your investors some form of closure helps them understand the long-term goals of your venture.
Starting a business is exciting, but turning an idea into reality takes hard work, dedication and money. Using these tips will help you win investor funds and the resources to get up and running, but it takes you, the entrepreneur, to make the magic happen.