Starting a business is no easy feat. Taking into consideration start-up costs as well as typical up-and-running expenses, businesses owners need a lot of funding to succeed. We all know how easy it is to make mistakes when seeking funding, so be on the look out for the 5 mistakes discussed later on.
Everyone makes mistakes, it’s what makes us human. But in the business world, cleaning up little mistakes can move you to the front of the pack and open countless doors of opportunity. Landing investors is important, and getting them early on can save a lot time, money and hassle later on.
Gaining investors depends just as much on which investors you approach as the strength of your business pitch. In order to attract investors, you need to focus on the correct stage of funding. Identifying the right stage of funding can be difficult, so below are a few common early stages of investment:
• Pre-seed Funding: the first/earliest step in the investment process where capital is exchanged for equity amongst friends, family and fools – no serious investors are interested at this stage
Before moving any farther with your business, your company should have at least $10k per month in revenue. Having a solid base is crucial to attracting big investors. They want to know that you are serious and that your business has potential.
• Seed Funding: the introduction of external investors to further research, prototypes, and business formation
• Series A: the introduction of your business into new market territory where investors become interested in company share
For additional information about the stages of financing, check out A guide to Pre-seed, Seed and Series A funding for startups (jumpaccounting.co.uk)
Approaching the Wrong Investors
The business world is based on numbers. Naturally, however, start-up business can’t rely on something that many think should be constant: how much equity to give up. Depending on your business, the amount of equity you will give up varies.
Factors such as how developed your business is and how much you want from investors determines the amount of equity you will likely give up. The particular investors you approach as well as your advancement in the stages of financing will also affect the amount of equity you will have to give up to expand your company. Generally, you can expect to give 30% of your company up during each round of investment.
Many business owners consider taking out a loan instead of giving up equity, but this isn’t always the best option. If your business is stable and growing, getting a loan can prevent you from giving up control over your company. But, if your company is still in the beginning stages, giving up equity can be safer than risking debt. So, is it better to get a loan instead of giving up equity? It depends on where you are at in your business journey.
One of the first things investors look at with potential companies is their pitch deck. While business plans are handy for supplemental information, pitch decks can make your company and products appear much more appealing and professional.
A pitch deck is a brief overview of your company, business plan and potential goals. When pitching to investors, this short visual presentation is essential for enticement. Though quick, it is relatively detailed and one of the best ways to convince an investor that your business has the potential to succeed.
If you want to write a pitch deck, but don’t know how to stand out from competitors, here is a website with some great tips: Pitch Deck Design: 10 Tips to Stand Out | Design Shack
If you don’t know how to write a pitch deck, consider hiring a writing service. WritePal is highly recommended and produces quality work. More information can be found on their website: Home Page (writepalglobal.com)
Have you ever heard the saying “Know your worth?” Knowing the worth of your business can greatly impact the amount of equity you keep. By valuing your company as high as possible, the equity you give up per dollar is less. This means you have more control over your business and greater potential for financial growth.
For example, funding of funding of $300k on a valuation of $1 million means you give up 30% of the company, whereas $300k on a $2 million valuation means you give up 15% of the company.
Knowing the true value of your company also helps set the groundwork for a business growth plan. Having a realistic plan can help attract additional investors, while also benefitting your company as a whole. Growth plans help keep you on the track to succeed.
Every business owner thinks that their ideas are top notch and a no-brainer for investors. For some, this might be true. But, be real. Overselling your business isn’t going to persuade investors. While your business might have potential, no one knows if your company will be successful in the long run until after you get sales feedback from a wider market.
Pitching the potential success of your business to investors is important, but should be founded in what is known and projected. A sound pitch is much more effective than a fluffed one. Discuss the associated risks with your business and how you plan to handle situations as they arise. Also make it clear what you want from investors and what you plan to put their investment towards.
Most of the hard work is already done by the time you are pitching to investors. You have a goal and a plan to achieve it. Now, you just need to convince investors that your plan can work. If you avoid the mistakes previously discussed and focus on pitching realistic outcomes, you should haven no problem convincing a few investors to get on board.