Fund raising is an important aspect of any entrepreneurial journey. It's important to get capital for one's idea, but it's even more important to understand when to approach an investor for funds. Here's what I believe an entrepreneur should consider prior to raising funds -
1) List down your fears
The number one fear for any entrepreneur is failure. Irrespective of whether this is the entrepreneur’s first venture or tenth, there is always a risk of failure. However, it is important to not allow this failure to hamper the company’s growth or the ability to pitch to prospective investors. It is important to overcome this fear right at the beginning or find a way to redirect your fears into something else. Another common fear is societal pressure – How will this failure affect close family and friends? So knowing your deep fear is critical for any entrepreneur.
2) Why do you need MONEY now?
You probably walked away from your well-paying job to start your own company. While you might be infusing your personal funds into the venture for maybe a year or two, there will be a time when you will need to start approaching external sources for money. This could be family, friends, mentors or investors. While pitching to all of these potential money lenders, you will need to justify why you need additional funds. The best reason to ask for money is because you know your audience very well. You have found a great problem that needs solving and the existing solution is not enough, moreover your customer base is increasing. Now you want money to scale upwards in technology or expand to other markets with clear goals set. Raising money in this situation is a matter of scale – it allows you to do things you can’t do otherwise, like hire people to help you scale faster.
3) Define your audience – clearly
A start-up is built to provide a solution to a problem or to enhance the existing solution. It is built for a specific audience. For example, LinkedIn solves the problem for job seekers and recruiters. This is a market place to connect job seekers and job providers. Uber got off the ground to solve a major problem that was faced – hiring cabs instantly and carpooling to reduce pollution.
If you don’t understand your audience needs very well, you won’t be able to build a sustainable business. You might make some short-term money and the business will run for some time. But businesses built for a specific audience and that solve their problems like never before, will flourish and have potential to grow globally. So knowing your customer is critical before starting your company and raising funding.
4) What is this money used for?
Are you going to hire people? Are you going to expand your office space? Are you going to do interiors? Are you going to hire contractors to build your app or website?
The minute you hire people for any department, stakes get increased. Now the company has to sell more to more customers to bring in enough revenue to not only pay your own salary, but also to support each of the hired employees. Raising money allows you to do all kind of fun things in short term. Those short term decisions have long term effects on your business. Sometimes it’s better to start simple with something you can manage yourself rather than get in over your head.
5) Are you building this business to sell?
You have to be very clear on this. Most of the investors want to know the founder’s intentions. If you meet an investor who wants to sell off faster and make money, it might be the wrong choice for you if you are a person who wants to solve certain problems before selling off to make money. So be clear on why you are building and try meet investors who align with your vision.