According to Forbes, 9 out of 10 startups fail. Failure is more frequent than success when it comes to startup companies. It is difficult to run a startup, but it is also rewarding. You may be set to go with your business but you may be facing the most damning problem of them all – funding. Cash flow problems are said to be largely responsible for 82% of small business failures. Here is a helpful guide that tells you how to position yourself for funding as well as funding channels to explore.
First, create a detailed business plan.
A business plan will increase your chances of securing funds. It should come after market research. It will give a clear description of your business and serve as reference to remind you how to proceed. It will provide information about your target market and your competitors. Finally, the proposed organizational structure of your company. Investors will need to see your financial projections. Make them as realistic as possible.
Here are important considerations for your business plan and all pitches you do. What are the points that serious investors will objectively consider?
First, your management. Investors want to know how much experience the manager/management possesses, their educational background and track record. Second, what problems are you trying to solve? What is your unique, sustainable solution? Uniqueness is important because it determines how competitive your market will be.
Importantly, ROI. How much return on investments are you promising and how long will it take before you become profitable? Also, can your business scale up? Can your business expand? Can it cater for a larger pool of customers? Can your process be replicated? Is your structure entirely fixed on you?
Finally, what is the exit plan? Private equity investors, especially, do not want to get stuck. They want to provide capital and support for your company, then sell out to other investors. This is why your business must be attractive to other potential investors.
Next, what are the direct solutions for your funding problem? What funding channels can you consider? Here is a quick list.
But hold on. Before we get to it, learn how to manage your operational costs! For instance, before you commit money into any major acquisition, measure the expense against the expected ROI. You may need to learn new skills as you go. Then, do not outsource a job you can do yourself. Choose team members who possess complimentary skills. Finally, build relationships that allow you to access free resources or barter – this way you exchange one service for another, instead of having to pay.
Now to our list.
a. Self funding
If you have the money, then you should consider funding your startup on your own. This way, you will not have to give up any equity, you will not pay interests on loans and you can keep all your eventual profits. The downside is losing all your savings of course.
b. Friends and family
Friends and family are second on the list for top startup funding sources. An advantage is you are likely to get money from these without having to pay interest. The downside however is the lasting, uncomfortable situation you may be put in if you lose their money. But that could also serve as motivation.
c. Strategic partners
A partner will share capital and liability. The downside is less profits for you and the possibility of conflict. While it is important to choose a partner you can trust, a detailed agreement is very helpful.
Crowdfunding websites are available for use. Some put you in a pool of professional investors, while others let you raise money from anyone. If your project is promoted properly, you can raise a ton of money. Examples of crowdfunding sites available to Nigerians are Kickstarter, NaijaFund, Funda Enterprise, CircleUp, MicroVentures, e.t.c.
You may visit a local bank and present your business plan to a loan officer. You would need to offer collateral of course. If you do not meet the requirements of a commercial bank, consider a microfinance bank. They allow payments in installments but their interest rates are usually higher.
f. Angel investors
Angel investors are usually entrepreneurs or former entrepreneurs themselves. They inject capital in expectation of equity, but you may also offer convertible debt. They are more likely to do seed investing (early stages). They can help you scale an idea into a prototype, for instance. They demonstrate their belief in you, your idea and plan. An impressive pitch with an angel investor may be all it takes. You may also benefit from their expert insights.
g. Venture capitalists (VCs)
Venture capital is a form of private equity. Recall our article on private equity. If you take this option, you would have to give away part of your business. Venture capitalist firms usually invest in the early stages of a company in exchange for an equity share. They also have a preference for startups within the tech industry or others with high growth potential. VCs will seek to cash out in a few years.
Other funding options exist. There are startup incubators that provide support to startups in order to prepare them for investments. Also, if your startup is in the relevant industry, you may apply for government grants.
And with that we have come to the end again.
At Volition Capital, we are all about Private Equity. Read this to understand what that really means.
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