Before you begin with fund raiser activities, you must calculate how much capital is required to start. This article helps you evaluate the possibilities of arranging the capital for your startup.
Incorrect Approach:
Generally, when we start meeting the financers and VCs, the common slant used before them is kind of the following:
- We want to construct some new product or service “S”.
- We need to recruit “N” number of people and buy “E” equipment to make it happen.
- We need “X” amount of money to complete the task.
- We need repayment buffer of “M” months.
- And we seek your support while raising the amount.
Sounds pretty dull… isn’t it? You cannot draw the attention of investors using such kind of pitch. It barely encourages someone to share your burden and fund your ideas.
Investor’s Objective:
Put yourself in the shoes of an investor and think what you would be expecting before financing a nebulous startup idea. There are only two types of markers: profitability and further funding activities. Earning profits is a potential aim, yet it cannot always be the key objective.
Both startups founders and Venture Capitalists are part of a quickly flourishing game that proceeds only with the cost of profitability. And that is why most of the times, the meticulous investors will ask you, “What milestones you will be needing to achieve for the next round of financing?”
This one question helps them evaluate the idea and decide whether they can put money in to your business or not.
Integral Perception:
The concept of funding is related to a chain of investors. To elaborate more, you might be asked by some pre-seed investor about what all it will take for you to get to the seed round.
Moving on, the seed investor will be interested in knowing what it will need to get you to series A. The series A investor would like to know what is required for series B, and the story goes on.
The message here is that investors think only in terms of some specific milestones that may be in terms of returns or business development or any other kind of target that displays the growth of your startup.
Initially, you will receive the money to validate that your startup has potential and is worthy of further investments from their side.
Financial Model:
While meeting the potential financers and VCs to fund your startup, keep a financial model and growth plan in place; trust me, it helps you get funding for your business.
In fact, it is an essential exercise every founder must go through at multiple stages. The operating plan for any business is designed on the financial model only.
On significance of financial business models, I would love to quote the advice from Kevin O’Brien, CEO of GreatHorn.
You must construct a real financial model. We all are a part of the moment, where starting a business is a lot easier than it could have been few years ago. Plus you don’t need the same capital to set up the business like you did then.
There are numerous options through which you can capitalize your startup and here comes the tricky part; it also makes it easy for the founders to seduce the investors by the artifacts of company: big teams, fancy offices and a lot of time spent talking to the investors and to the media.
Growth Indicators:
Your true concentration should be towards the acquisition, development and retention of an ultimately profitable consumer base. Rest everything, even the funding part, is a means to that end.
Just remember that you aren’t building the model for evaluation by your investors, rather to help you operate your business. Irrespective of your focus towards revenue or customer base; prospective investors want to understand how you are going to grow.
You must understand the things investors typically consider. Here are the most important ones:
- The Milestones to be achieved before the next round of funding
- The Resources needed to achieve these milestones
- The Time Frame required to achieve the milestones
Right Approach:
With the correct exercises and cost estimates; you will have a much better answer to the investors’ queries. And you can start like this:
- We want to achieve the Milestone “M”.
- For this, we need “N” number of people and “E” equipment.
- We therefore require “X” amount of money.
- We believe that we will achieve it in “M” months.
- And we seek your support while raising the amount.
You will be surprised to see the positive reaction from your prospective investors to this kind of request.
The Bottom Line:
Once you prepare a concrete model, you will be able to calculate exactly how much funds you need to raise. At the same time, investors will also realize that you did the homework and will operate your business responsibly.
The further step is to make the investors believe that yours are the right milestones; and you can achieve them quickly. This is where your business plan will come in picture and you will be a lot more likely to receive a cheque.
