Raising funding can be potentially expensive, as it requires resources, and time-consuming experience. Done correctly, it can yield valuable results and a substantial financial investment to grow your business. Enthusiastic entrepreneurs that want to go this route should be well prepared and display these five key essentials that funders look for when considering investing.
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1. Know your market
Clear and thorough market and competitor analysis is the mainstay of any successful business concept — even more so when seeking funding. Understanding who you’re selling to, what pressing need you’re addressing and what competition you’re facing enables the funder to evaluate the potential of your business, and their investment return.
Your business has to be differentiated in the eyes of your customer, not just by the technology behind it. What features and benefits does your business offer to the user that the competition doesn’t? More critically, a potential funder will want to know whether the market is willing to pay for these. You should have user numbers or customers to support this.
2. Understand your business model
You need to have a keen grasp on how much revenue your business can expect to generate and whether or not the business has the potential to be profitable. This means understanding the cost of acquiring customers, as well as the cost of creating and delivering the value of your offering.
Be realistic in these projections, and abandon the temptation to base your decision on assumptions rather than the facts, and restrain yourself from dragging untested formulae across columns of cells in your Excel spreadsheet. Just because a service is successful elsewhere doesn’t mean it’s as capable of addressing a need in the local market.
3. Have a solid development plan
Funders appreciate certainty and confidence: be clear about how much money you want to raise, but more specifically, how you intend using it and what it will allow you to achieve. This number does not need to be exact but you should know why you are raising money before you start trying to convince investors to part with theirs.
Your development plan should set out your growth or expansion targets, including technical aspects such as the product features you will be adding. It should not ignore operational elements such as legal, licensing and certification compliance and costs.
Be sure to raise enough money in your first round of funding to see you through to significant milestones. By the same token, be wary of seeking funding for a period over 24 months as it’s increasingly difficult to see that far into the future and the cost of raising such funds could become prohibitive.
4. Know your worth
While the process of attracting funding can be a key focus for entrepreneurs, be realistic about the value you are offering to potential investors.
It’s fruitless starting on this journey if your product or service isn’t at the stage that investors would be interested in considering your proposal. Be clear about investors’ requirements – whether they be venture capital, angel or seed funders, and realise that the valuation is dependent on your business’s risk profile, the industry, the technology platform and whether you merely have a proof-of-concept, or are already generating revenue.
5. Be a pig and not just a chicken
Jeff Bussgang from Flybridge Capital Partners in Boston talks about how VC’s are like chickens but that they want to invest in pigs. This relates back to the parable about bacon and eggs for breakfast, a meal where the pig is truly committed but the chicken is merely involved.
Funders want to invest in an entrepreneur or team who are fully committed to the business and its success. Taking your business from concept to at least a minimal viable product, or achieving proof-of-concept should not be dependent on raising funding. They want to know that you can achieve something significant with limited resources before they invest additional funds in your abilities to build your business into a winner.