Founders starting a business often struggle with start-up funding to finance the development of the product whilst not having any sales and therefore cash from customers. This presents challenges to the business founder which can in practise create a catch 22 situation, since without funding it is not possible to bring that product service to market. Without a fully functioning product together with sales to real customers, it is not possible to obtain funding to fully support the launch of the business.
1. Is your product market ready?
Do you have a fully developed product or service or platform which is ready to be offered to paying customers? Without a market ready product there isn’t really anything tangible for an outside investor to invest in. There is only an idea without the means to turn the idea into something tangible. The founder must take the responsibility at this stage to ensure that he has a functioning product to take to market before engaging with outside investors.
2. Is your business pre-revenue?
Pre revenue businesses extremely difficult to finance since then represent period of maximum risk to everyone concerned. Normally this stage of the business it’s funded by the founder and his friends and family who all convinced buy the product or for reasons of blood or friendship feel compelled to support project. Following the support of friends and family the development of the market ready solution needs to be completed said that it can be marketed to real customers. This premarket situation does create a significant hurdle for the founder to overcome.
How to overcome significant hurdles is a way in which those who can be separated from those who can’t. It is important for the founder to understand that going to market too early seeking additional finance can actually prejudice the whole business. Early stage funders tend to be a tight knit group who talk to each other and are quite happy to put a black mark against pitch with which they have been particularly unimpressed.
3. Is your business post revenue?
At the post revenue stage, the founder has created a product and has taken it to market. Customers have purchased the product and there is a track record of customer satisfaction. The product has been subject to a marketing campaign either physical or digital or both there is growing interest from you customers beyond those who had been engaged at the very early stage. This is the stage at which outside investment starts to be interested in supporting the business,
Since the risk all the business for new plant on its face is much lower than it was and it’s pre-revenue stage. Founders must understand that investors are seeking a return on their money and that is their main motivation. They are not altruistic, doing it out of the kindness of their heart or for some sort of communal pat on the back. These are hard nosed investors who wants to minimise their risk and maximise the upside of their investment.
4. Do you have a compelling funding proposal?
A compelling proposal is absolutely vital to successfully funding your business venture. This should include detailed a business plan, pitch deck and three to five year financial forecasts. this is an important component of the fundraising process and most funders will require external support for which they will need to allocate funds.
This is a necessary investment in the future success of the business. It should not be subject to short cutting in order to save a small sum of money. This should be considered as an investment which will repay many times over in the increased valuation of the business.
5. Can your business be scaled-up?
Important that the business can be scaled up. This means that the profit margins and cash flow improve as the turnover increases. This means that the business can grow easily and quickly without the need for significant additional levels of investment.
Conversive scaleup is that the costs of the business increase on a step basis which in the short run can mean that additional funds are required to support increases in turnover early in the business is post investment phase of growth.
6. Do you have an exit plan?
An exit plan is necessary as part of the fundraising process so that investors how my clear understanding they will get a return their money and over what times scale. Most exit plans are on a 5-to-10 year basis and will be based upon a trade sale to a third party, sale to a private equity company or an IPO.
It important to be clear as to the preferred rout to exit since then the management team and the investors can work together focusing on run the business with a view to exit on a clear timeline.
Process of fundraising is fraught with challenges but having successfully navigated the barriers, pitfalls and hurdles the founder is that in a position of excitement and enthusiasm. The support of the founders validates their idea and provides confidence and support for them as they head out turning their vision into a real business and ultimately a wonderful return on investment.