What should startup know before seeking funding?

You’re curious about a business idea. You’ve discussed it with your friends and relatives. You may have also left your work to begin pursuing entrepreneurial opportunities. You’re on the verge of launching your company, but you’ll need funding to do so, and you can’t raise it all by yourself.

Your natural instinct is to pursue capital as soon as possible to generate traction for your company. Although the degree of commitment and dedication is impressive if you begin finding support until you are ready, but you risk losing your time and falling short of your goals.

What should startups know before seeking funding?

Before approaching an angel investor, a venture capitalist, or a crowdfunding site for financing, ensure that you have met any of the conditions on this checklist:

Also, check out, Types of Funding for Startups.

What should startup know before seeking funding
What should startup know before seeking funding

1. A fully developed strategic plan

This is the very first thing on the list for a reason: it is by far the most critical. Without a business strategy, it is impossible to start one. It is the bedrock upon which your business will be based.

As such, it can include any or none of the points below; keep this in mind while you build it. Your objective here is to provide an overview of your company and how it can generate revenue.

2. Business analysis

Market research is the quantifiable evidence that shows the idea’s need and feasibility. Without it, the concept can be just theoretically sound.

You will have to pay for access to data or do your own analysis, but you must have this numerical foundation if you want to demonstrate your future merit.

3. Financial simulations

These can be included as a normal part of the business strategy, but do not underestimate the amount of detail expected by most astute investors.

You’ll need detailed spreadsheets outlining estimated expenses, investments, purchases, and earnings, as well as profit margins, development rates, and the anticipated date of profitability. This will demonstrate that the company is profitable.

Also check out, Why do people leave big tech companies for startups?

4. Goals for one, three, and five years

From the start, don’t just focus exclusively on how you can develop your firm. You’ll need to plot the expected development over the next year, three years, and five years.

The majority of investors want a long-term investment in a stable sector.

5. Prospective clients

Though market analysis can provide a theoretical user base for your concept, future consumers can hammer home the argument.

If you can obtain at least a few testimonials from your prototypical consumer or a significant client who is involved in your project, investors would be even more receptive to partnering with you.

6. Genuine capability

Additionally, you’ll want to ensure that you’re capable of directly managing the initial phases of production and company growth. If you have years of business experience or other proven qualifications, you should be fine.

Otherwise, you’ll need to attend preparation or enlist the assistance of external resources.

Also, check out, How to Hire Developers for a Startup Without Funding

7. Current investment

If you have some capital in the market, it looks fantastic to prospective investors. Utilize all available savings and raise some initial money from friends and relatives to demonstrate to clients that you have some financial funding.

8. A trademark

Typically, the brand would be established during the promotion stage of your business’s growth, not during the fundraising stage.

However, a good name will assist you in convincing prospective customers of your business’s feasibility and character. It’s an expression of identity that can succinctly and creatively convey the message.

Check out, What Tech Startups Look for In Employees

9. A purpose

Before you begin requesting funding, you must determine precisely how much money you need and why you need it.

There is a significant gap between declaring, “I need funding for my project,” and declaring, “I need $10,000 for supplies, $15,000 for an office, $20,000 for the first run of merchandise, and $5,000 for promotion.”

The latter demonstrates that you have a strategy and informs investors of the intended use of their funds.

10. Payoff

Finally, but certainly not least, ensure that you have a clear payoff insight for your clients. For a crowdfunding campaign, these can include offering sample items or prizes at various investment stages.

For individual buyers, this will imply an estimated payoff after a certain time span has elapsed.

If you’re missing one or two things, it’s not a deal-breaker, just be certain you’ve checked off the majority of the items on this page before you go.

If you can do that and the proposal resonates with the appropriate audience, you should have no difficulty raising the funds necessary for the next step of your enterprise.

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What Kind of Questions Will Investors ask?

What should startups know before seeking funding
What should startups know before seeking funding

Team Members

Many investors place a higher premium on the team behind a startup than on the idea or the product. Investors would want to know that the team possesses the necessary expertise, drive, knowledge, and disposition for development.

Anticipate the following inquiries:

  • Who are the promoters and core members of the team?
  • What domain expertise would the team possess?
  • What are critical changes to the team needed in the near future?
  • Why is the team best qualified to carry out the business plan?
  • What is the company’s staff count?
  • What drives the founders’ actions?
  • How do you want to scale the team over the next year?
  • Finally, the investor must determine if the creator and staff would be a pleasure to interact with. Is the investor confident in the team’s abilities?
  • Is the CEO knowledgeable and receptive to feedback?

Additionally, involving seasoned consultants during the early stages may be extremely beneficial in bridging an early stage team that is already rising.

How large is the market opportunity?

Most investors are searching for companies that can scale and become meaningful, so make it clear upfront why your company has the potential to become extremely large.

Offer no minor proposals. If your initial product or service is tiny, you may want to place your business as a “platform” business that enables the development of several goods or applications.

Investors may like to know the target market’s size and the share of that market you want to capture over time.

For most investors, a “big” business opportunity is described as one with annual revenue over $1 billion.

Read, How much do startups spend on marketing?

What Kind of Early Success Has the Company Had?

For buyers, one of the most important indicators would be evidence of early traction or consumers.

A startup that has achieved early success is more likely to gain venture capital funding on favorable terms. The following are few examples of early traction:

  • The creation of a proof-of-concept or minimally viable product
  • Customers who are new or piloting, especially brand-name customers
  • Collaborations on a strategic level
  • Client testimonials

Acceptance into selective systems such as Y Combinator or other technology accelerators or incubators

Investors may like to hear the following: How will the initial momentum be increased? What was the primary factor that contributed to the traction? How is the firm going to scale this?

Don’t forget to include some early hype or press coverage you’ve got, especially from well-known blogs or publications.

Have a slide with the news of the investor pitch deck. Indicate the number of papers and magazines in which the organization is listed.

Check out, Is investing in startups a good idea?

Are the Founders Determinate and Passionate?

Numerous investment capitalists are on the lookout for entrepreneurs who are passionate and committed. Are these people committed to expanding the enterprise and overcoming unforeseen obstacles?

Are the Founders Aware of Their Business’s Financials and Key Metrics?

Venture capitalists want entrepreneurs who have a thorough understanding of their business’s financials and key indicators. You must demonstrate that you understand both of these and can express them coherently.

Was I referred to the entrepreneur by a trusted colleague?

Unsolicited corporate summaries and pitch sheets flood venture companies. Typically, these solicitations are dismissed. Have your trustworthy colleague introduce you to the investor.

This can be useful if the colleague is a well-respected business person, an investment manager, an angel investor, or another venture capitalist.

Is the pitch deck interesting?

Before interacting with a venture capitalist, the investor would need to see a 15-20 page investor pitch sheet. The investor hopes to see an exciting business model of dedicated founders and significant potential in the pitch sheet.

Therefore, ensure that you have planned and vetted an excellent pitch deck. Examining other pitch decks and executive summaries will aid in the creation of your own. See How to Build an Outstanding Investor Pitch Deck for Financing Startups.

Read, 16 Best Employee Benefit packages for Startups

What Are the Business’s Potential Risks?

What should start-ups know before seeking funding
What should start-ups know before seeking funding

Investors want to know about potential threats to the company. They’re interested in your thinking process and the steps you’re taking to mitigate those threats.

Any strategic plan inherently contains uncertainties, so be prepared to thoughtfully answer the following questions:

  • What, in your opinion, are the primary threats to the business?
  • What regulatory threats are you exposed to? Will the market model be compliant with existing rules, particularly those about expanded privacy protections?
  • What technological threats are you exposed to?
  • Are you exposed to regulatory risk?
  • Are there any risks associated with product liability?
  • What precautions are you planning to take to minimize those risks?
  • Startups who can demonstrate that they have mitigated or removed the product, infrastructure, revenue, or industry uncertainties would have an edge when it comes to raising capital.

What Makes the Company’s Product Outstanding?

Since the entrepreneur must specifically express the essence of the business’s product or service and why it is exceptional, entrepreneurs should anticipate the following questions:

  • Why are consumers so invested in your product or service?
  • What are the product’s big milestones?
  • What are the product’s or service’s primary distinguishing characteristics?
  • What have you found about the product’s or service’s early versions?
  • What are the two or three most important things you want to include?
  • How much do you plan to enhance or update the product or service?

How Can My Investment Capital Be Used and What Will Be Accomplished With It?

Investors would unquestionably want to see how their money will be spent and what the projected burn rate is (so that they can understand when you may need the next round of financing).

Additionally, it will allow investors to determine if the fund-raising proposals are appropriate in light of the capital requirements.

Additionally, it would allow investors to determine if the cost estimates (e.g., for tech expertise, marketing expenses, or office space) are fair in light of their previous interactions with other firms. Investors want to ensure that you have enough money to reach the next target before raising further funding.

Read, How tech startups use investments?

Is the Company’s Expected Value Realistic?

If you tell an investor you want a $100 million valuation despite the fact that your company launched three weeks ago or lacks momentum, the discussion is likely to end rapidly.

Sometimes, it’s better to avoid discussing valuation during a first meeting, except to state that you intend to be fair with respect to valuation.

However, the venture capitalist may not want to spend time on a contract with unrealistic or unattractive value demands.

Valuation of a technological business in its infancy is more an art than a study. Investors also seek convertible instruments with customary conversion discounts and valuation limits assist in bridging the valuation gap for a young startups.

Is the Company’s Technology Distinctive?

Given that most venture capitalists invest in apps, internet, smartphone, or other technological businesses, it is important to do a technology review of the startup’s or proposed technology. Among the inquiries that the buyers will make are the following:

  • How distinct is the technology used for the business?
  • What comparative benefits would this technology provide over currently available technology?
  • How easily can the invention be replicated?
  • How much money would it cost to incorporate the technologies into each product?

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Final thoughts

As previously said, the initial meeting is reasonably simple to arrange. Investor email addresses are often available on corporate blogs, and correspondence may often be made via social networking.

The difficult part would be ticking off the above boxes that interest investors: going full-time, being agile, correctly integrating, showing momentum, and providing an unforgettable pitch.

When in question, just take each task one at a time! It can be difficult to construct a product without a technological co-founder or to sell a product without marketing expertise. However, much of this is entirely possible with sufficient passion, ambition, and self-education. Having said that, there is little need to undertake this trip alone.