As this is a very extensive subject, this article will only cover the basic and most essential information as the first step to bring you closer to understanding the broad and complex world of startup investment.
Understanding startup fundraising
First-of-all, let’s talk about “seed investment”. Seed capital itself means the initial capital raised by business ventures. It is required for the company to begin business activity and get the startup off the ground. Without startup funding the vast majority of startups will fail. Considerable resources are needed to employ staff, buy office equipment, rent the working space, cover the marketing expenses and, most of all, further develop the company. For smaller startups raising such a capital might present quite the challenge. Bank loans are not always an available option, nor are they necessarily the most optimal choice for beginner entrepreneurs.
This is where fundraising comes into play. There are many advantages to this type of seeking and gathering financial contributions, and there are various methods and sources that entrepreneurs can resort to. Luckily, there are many investors interested in supporting the right startups. To mention a few, venture capitalists (VC), crowdfunding platforms, foundations or angel investors are options available for businesses wanting to raise their seed capital. The bad news is, fundraising isn’t easy. In order to find an investor willing to put their capital in your company, you have to impress them and convince them of the business viability of your project.
What is the most optimal method of fundraising for your company?
As mentioned before, there are many options for initial fundraising you can choose from. What are their distinctive features, the biggest advantages, and which one is right for you? Let’s take a look at possible investors and funding methods.
VC. Venture capitalists are private equity investors that provide financing for companies and startups with a long-term growth potential in exchange for an equity stake. The venture capitalist manages a pooled capital of third-party investors and is often expected to bring their own managerial and technical expertise to their investments. Typically VCs rather than funding startups from the very beginning, they choose companies at the stage where they seek to commercialize their product or service. The VC fund will put the pool capital and invest in such firms, help them grow and strive to profit with a significant return on investment (ROI). A venture capital firm often employs specialists with technology backgrounds, business training or extensive experience in the industry, it is therefore probably the most professional option available.
Crowdfunding. Raising funds through an internet platform has become very popular over the last few years due to its accessibility. It is a method well-adjusted to the current times of globalization - it allows project creators to reach people from all over the world. It is a method characterized by a low entry barrier for investors, it often allows to find contributors that are actively engaged in the projects, makes it possible to acquire funding while simultaneously marketing the product or service and gaining potential clients. In case of startup funding, the most typical kind of crowdfunding is equity crowdfunding, where investors receive unlisted shares in the business for their contributions. The very public character of crowdfunding is a big advantage, but can also have some downsides - some ideas might get stolen and, in case of a campaign failure, the creator could risk damaging their reputation.
Business angels, or angel investors, are individual investors with a high network and experience in the business sector. Aside from capital, thanks to their entrepreneurial background, they can offer invaluable advice, and, quite often, connections. Unlike venture capitalists, angel investors invest their own money, so the risk they are taking comes straight out of their pockets. High risk means angel investors require a high investment’s rate of return, and they like to have a defined exit strategy to minimise losses in case of a business failure. However, a big advantage for the entrepreneur is that, typically, there is no debt that they owe an angel investor in case of a business failure. Some studies show that angel-funded business ventures are more likely to succeed than companies with other forms of initial funding.
How to get started?
- Flesh out your idea. What service or product does your company have to offer? How do you plan to realise your project?
- Define funding goals and project objectives. Create a roadmap that will help you stay on track, motivate you, and guide you to achieve funding goals and other objectives.
- Create your budget. Prepare a budget sheet, explain clearly how investors’ capital will be used, consider all the necessary expenses.
- Research possible fundraising methods and investors. Choose those investors who have companies from your sector in their portfolio. Decide where you could seek funding - crowdfunding platforms? Venture capitalists? Should you try getting the attention of angel investors?
- Work on perfecting your pitch. What does your business venture have to offer to a potential investor? Remember the key points to consider while making a pitch, try to understand the way investors think to make them believe in your project.
How to pitch your startup idea?
What makes a promising startup company? Among many different factors, the most vital ones are probably a compelling market, qualified team and a strong product/service. Big competitiveness requires businesses to stand out, offer innovative ideas that potential customers will be interested in. Aside from that, a well-working group of people invested in making the business succeed is virtually essential. Before preparing a pitch remember to get to know your potential investors. Research their business portfolio, find out what (and why) they like to invest in. Above all, include the most essential information in your pitch - why is it a promising product, what makes your team perfect for their task, why is your idea something worth believing in. Make sure you listen carefully to what the investor has to say and be prepared to answer their questions. Investors are looking for compelling business founders not only who have big dreams but also tangible evidence to back it.
That’s why while preparing a pitch, it is important to include information to show that makes your business venture trustworthy and proves your project’s potential. Try to remember some of the key factors that investors consider while estimating a business:
Business model: what is the economic viability of your business plan? What are your plans and hopes?
Leadership and team: Do you have a competent leadership team? Do you possess the necessary skills and experience? Do you have people on board who will help you grow your company?
Long term perspective on the market: How does your product/service fit in with broader consumer trends?
Competition landscape: does your business have a big competition? How does it plan to stand out?
Scalability: do you have any plans for growth and expansion of the company?
KPIs: performance measurement of your initial business activity to prove your business venture has potential. Business metrics, existing revenue, profit margins but also consumer reviews, product reviews, initial customers, statements, partnerships and media coverage.
Innovation: Are you offering new solutions? Using new technology? How does this help you gain a competitive advantage?
This is of course a selection of the few most basic and essential points to consider and include while preparing a pitch. Remember to thoroughly think through your presentation before your meeting with the potential investors. Stay confident and believe in your idea and your team. We hope this short article has helped you to understand startup investments a little better, and we wish you best luck with future business endeavors!