Learn to get your startup funded
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The document provides comprehensive guidance on securing funding for startups, covering essential aspects such as calculating total costs, identifying main sources of funding, and exploring alternative financing methods like crowdfunding. It emphasizes the importance of having a clear business plan and strategy to attract investors, whether they be angel investors or venture capitalists. Ultimately, it highlights the need for entrepreneurs to find their true motivation beyond monetary gain to successfully navigate the challenges of the startup journey.
Learn to get your startup funded
- 1. wwww.digitalerra.com Learn To Get Your Startup Funded You have an idea but how will you turn into a reality. The fuel required to make your idea fly high is “Funding” and therefore today, in our 2nd part of the “Startup Week Series”, we discuss the fundamentals of funding your business. The piece is of great help for all fund seekers, entrepreneurs, startups and related fields of interest. So, let us explore for what it takes to get funds! 1. Start with a number You have to start with knowing how much you need. It’s not a random number, and it’s not how much you like. You look for the startup sweet spot, as set by the business plan. For instance, your total cost could be identified.
- 2. wwww.digitalerra.com Total cost= Total fixed cost + Total variable cost Total cost (TC) in the simplest terms is all the costs incurred in producing something or engaging in an activity. In economics, total cost is made up of variable costs + fixed costs. Variable costs (VC) are costs that change based on how many goods you buy or how much of a service you use. Fixed costs (FC) are costs that don’t change from month to month and don’t vary based on activities or number of goods produced. They stay exactly the same. 2. Main sources of funding The main sources funding new businesses are personal savings, personal debt, commercial debt, friends and family investment, and outside investment. Debt means you pay it back or lose your collateral, and investment means you don’t pay it back but investors own a share of your business. This doesn’t include alternative ways to get startup financing. Some alternative ways of financing: Prepaid sales: Get a company that knows and trusts you to prepay services, or product development. Give one or more key customers an attractive discount for betting on you early. Non-traditional borrowing: Angel investors can lend you money if they want to take a risk on you that way. Usually they’ll do it only for additional benefits to compensate for additional risks. That could be a high interest rate, or some portion of debt.
- 3. wwww.digitalerra.com Percent of revenue, or royalties: You might find a company that would work for a small fixed fee per month plus a small percentage of future revenue. Do-now pay later: Offer somebody a contract for services paying a bare minimum now and then twice as much later on, as a balloon payment or a series of payments. 3. SME loans SME-guaranteed loan can lower the personal risk. You get these loans through commercial as well as nationalize banks. Watch out for different Government schemes and provisions. 4. Crowd funding on the rise As of now, crowd funding has become an emerging way of raising capital entailing the use of social media networks – Facebook, Twitter, LinkedIn and some dedicated websites. There are ample resources like Catapoolt, Kickstarter and Indiegogo available on the ‘World Wide Web’, allowing entrepreneurs and startups to initiate their crowd-funding ventures. Remember, using these platforms is easy at the same time needs creativity. Build web pages hosting information, promotional videos and images of the products or services for which you need funding. Ensure that the pages you create are catchy, explanatory and engaging for the audience. 5. Convertible Debentures A convertible debenture is a non-valued investment. The benefit for founders/management is that deferring the value of the business may enable founders/management to increase the valuation beyond the amount of debenture
- 4. wwww.digitalerra.com financing. This can reduce the dilution to your startup ownership. Convertible debentures differ from traditional debt. The principal of the debt plus all accrued interest will be converted into the class of shares offered to new investors in the next round of financing at a price equal to (or at a discount of typically 10-30%) to the price of and on the same terms as the shares that are offered to the new investors. This type of deal has become the frequent choice of angel and other groups who are providing seed funding to start- ups that expect to seek additional funding within a year of the initial investment round. 6. Angel and Venture Capitalist (VC) Investment Angel investment and VCs are for businesses that offer a reasonable chance of future returns on a few hundred thousand dollars. Real investors usually want scalable, defensible, high- growth businesses that can be sold in 3-5 years, with experienced management teams.
- 5. wwww.digitalerra.com So what does a Venture Capitalist look for in a Startup? Investors, in sharp contrast to friends and family, either believe in your business prospects, your market, and your team, or they don’t invest. They’re doing it to make themselves money. Startup Plans that lay out its vision and mission in clear language and then follow up with an actionable strategy and design to implement it is what a VC looks upon. Exit: Also, the investor looks for a deep understanding of your financials. You need to have a believable revenue-to-expense model, as well as initial thoughts on potential exits including
- 6. wwww.digitalerra.com when you expect to exit. A presumably successful exit plan in hand attracts the attention of Investor. Of course, the fact of the matter is that the top VC firms, super angels, and angel investors have unparalleled deal flow, they see hundreds, sometimes thousands of pitches. Sure, there are plenty of resources where entrepreneurs can go to learn more about VCs and top entrepreneurs, where they share their inside knowledge in order to enlighten and educate. And, as mentioned, there are an increasing number of options for funding: Incubators, company builders, accelerators, VCs, angels, crowd- funding portals, and more. You can imbibe this winning formula: Big and bold idea I.M (Authenticity, Integrity, Motivation) A+ winning team I.P (Rapid Iterations & Pivoting) Objectivity & Adaptability Finally, here is a list of self-assessment questions an entrepreneur need to ask for himself. Do you have a viable, rapid-growth, highly-scalable idea? Does your business suit the venture capital model? What is the size of the market that your startup is targeting? What is your reason for starting up? Are you ready to share control of your startup? Which venture capital fund is right for you? Do you have the boldness and perseverance to sustain tough patches?
- 7. wwww.digitalerra.com And finally, can you get a VC excited about your startup? Conclusion Having said all, money is not a sufficient motivator to overcome the ups-and-downs of the startup journey; instead entrepreneurs have to search for their true motivation and pursue problems that they feel genuinely passionate about.