If you are starting out in a new business venture, there is every chance you will need some form of funding.
…but before you start, do you really want outside investors involved in your dream?
You may prefer to bootstrap your business. Bootstrapping is a term for starting a business without any external capital investment. The development of such startups is funded through internal cash flow and, as a consequence, the owners of such a company will need to be cautious with their expenses.
However, if you think having external investors is the only option, you must consider the following.
If you do not already have some experience in starting a business, then it will be very difficult to secure any form of investment. If you have a great idea but no business experience, then you should consider having someone on your team who does have business startup experience.
Investors will not be investing in your business just for the fun of it. They will want to own a part of the company which obviously means you will no longer be 100% in control of your company.
Investors will no doubt want to have a say in how the company is run. When you have investors on board, relations with them are of paramount importance.
You will need to answer to them and keep them informed of developments on a regular basis.
…and if you make a hash of the business, you will hurt these people.
So you must think carefully if you are the sort of person who can accept input from others, or whether you are the sort who needs to make all the decisions.
Valuation of a startup company can be difficult. The idea may be worth millions in theory but it all has to be put into practice. If you tell an investor your company is potentially worth $10 million and you are seeking $1 million to get started, then in simple terms, you are offering 10% of your company. An investor prepared to offer $1 million may want more than 10%. After all, it is their money at risk.
Although not every business owner runs to a tight business plan, the more detailed information that investors have about the potential of the business, the more accurately they can put a value on their investment.
Although investors in startups may be interested in a long term view with dividends being paid out by the company, their main priority will be to see a see a return on investment as soon as possible. Investors will want to know of exit strategies.
There are many articles that can be read on exit strategies.
Your business will need to be scalable to attract large investment….
…but investors are not likely to be interested if the only way to double your sales is by doubling the amount of customers.
Anyone can say "If we have one million customers paying $10 per month, we will have $10 million per month coming in; and if we increase that to two million customers, we will then have $20 million per month coming in."
You will need to prove to an investor how you are going to attract more customers; but also how you are going to offer more services to existing customers.
There may be exceptions to how an investor sees the potential growth of a business.
For example, a website with free membership (eg Facebook) may not double its sales if the membership doubles but if the overall running costs of the business remain the same even with an increase in membership numbers, and a significant increase in revenue is attained, then the business can still be viable.
The easier it is to copy your business, the less likely you will find a willing investor. You should ideally have specialized knowledge that few others have. It is useful to own patents where necessary (although that could be open to debate), protect your trade name and so on.
If you still think external funding is the only way forward for your business, you must choose carefully which investors you approach.
Some may be very helpful and become collaborative partners; maybe even mentors.
Others may be too critical and be more of a hindrance to the business.
Whatever you decide, Good Luck in your Startup venture.
Posted by Paul Mercer. Thank you for reading.