For the most part, there is usually very little ‘fun’ in funding. For many entrepreneurs raising funds for their companies is quite a headache. It is probably the most stressful part of launching a new business or upgrading an existing one.
There are some options to raise funds, from a bank loan, a microloan, or funds from friends and family. Another viable option is funding from investors. You will need to decide what kind of business funding you want. Are you ready to pay back a loan with interest? Or are you willing to offer part ownership of your business?
If you decide to search for investors, keep reading!
Last week, we spoke about the different stages of business funding, so as we aim to give you comprehensive information, here are a few tips on how to prepare before approaching investors.
You as an entrepreneur need to provide investors with a good enough reason to put money into your business. And the main reason is a positive return on their investment. You have to prove that your business will make them money, and here’s how;
The correct documents show that you have done your homework, and the below documents are a necessary part of any pitch to potential investors.
This is essentially a short synopsis of your business – usually just a few sentences. It should convey three major things – the problem you solve, the solution you provide, and the people you do it for. This statement can be used in introductory emails, presentations, and of course, during chance meetings, be it in an elevator, or on the street.
This is your business plan translated into slides. It needs to be prepared before giving a formal presentation to investors. Prepare a visually appealing document that highlights the key points. Use graphs and other visual assets that help communicate the value of your business idea.
A well-written executive summary sums up your business plan into a few pages. Distill each key area of your business into one or two paragraphs. Once you have given your elevator pitch, this is the document you will present to interested investors who request more details.
It is usually assumed that all entrepreneurs create a business plan long before approaching investors. In reality, trying to create a 50-page document outlining how your business will work is time-consuming, and few entrepreneurs have the resources, time, or desire to complete a business plan. But it is a very valuable document to have and the real value lies in the planning, brainstorming, and research necessary to make your idea more credible.
Not every business needs a website, although it is advisable to have one. After hearing your pitch, some people may be interested in learning more about your business. Your website should work as a virtual brochure that provides a professional view of who you are, and what you aim to achieve. It is also much easier to direct investors to your website instead of sending documents back and forth.
This is one of the key documents you will be asked to provide and should cover three main areas such as revenue projections, operational expenses, and expected cash flow.
The complexity can range from a single slide in your pitch deck or complicated Excel documents.
Try to provide comprehensive data as proof of a profitable business venture. It is your duty to show investors that they will make money through their investment. Give details about how much you expect to bring in, when you will reach your goal numbers, and when your investor can expect to start earning.
Serious investors may hear pitches on a daily basis, many packed with hard data, so what makes an investor choose one business over another? Your story could be the differentiator between your pitch, and other pitches.
Explain why the business matters to you and the need you plan to solve. How will it change the world? What makes it special? This narrative will set the correct tone to draw in potential investors.
Investors need a clear picture of how their investment will work. Firstly, you will need an accurate valuation of how much your business is worth, before offering shares. Legal issues such as voting rights must also be clearly outlined.
You will need a comprehensive stockholder’s agreement, and possibly a corporate constitution. It should include owners’ rights and obligations, and what happens if they want to sell, or even if there is a change in leadership.
It’s important to seek legal counsel from a professional, in case you have a highly successful business but find that you have lost control of it to your investors.
New entrepreneurs need to leverage their networks as it could be the easiest way to pitch a business idea in a less formal, more organic fashion. By networking among local startups, and the investment community, you have the opportunity to mention your business.
According to Diana Godwin of AquaMobile Swim School, “Most of my meetings with investors developed by being out at an event and mentioning my business…Letting things happen organically can yield great results.”
No business owner wants to come off as being too desperate, so asking for advice is a great way to approach potential investors. Instead of cold-calling and sending emails en-mass, find investors that you admire and work to build a relationship. They will be more likely to invest in your business at a later stage, and you are bound to find an engaged, passionate investor.
You need to not just sell a business idea, you will also need to sell your team. It is advisable to have co-founders because investors tend to look for talented co-founders, instead of a sole founder.
A partner also provides necessary support as you launch your business, and finding the right one will prove to be a huge boost for your company in the long run.
A simple question could be the difference between landing a huge investor or leaving empty-handed. You must be prepared to answer any questions you may face with authority.
Questions can fall into a few distinct categories such as issues to be solved, your solution, how you will attract clients, your team, future roadmap, why the investor chose your company, who are your competitors, your business model, and your target market.
So we have outlined the key things you will need to know before looking for business funding. With enough preparation, the process does not have to be a big challenge, and hopefully, your business will be a success, and you can work towards launching an IPO – but more on that soon!