Funding 101: How to Position Your Startup as a Good Investment Why you should look beyond bootstrapping and loans from friends and family to set your company up for success and win investors.
By Brad Sugars Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
Raising money for your startup is an ongoing concern for first-time (and often, long-time) business owners. The fact is: securing money can be a challenge. If it were easy, everyone would be doing it.
Another fact: most people simply don't invest enough time and energy into getting their ducks in a row to secure proper financing, which is why so many owners default to bootstrapping their operations.
If you're looking to secure outside money from sources beyond friends and family, here are some tips to position your venture as a good investment:
Know what investors want.
Investors are looking for three things: the people behind an idea, the idea itself and an answer to the question: How will I get my money back?
Most concepts fail to get funding because there's a great team, but no idea; a good idea, but no team or there isn't a clear indication of how and when a return will be generated.
If you are three-for-three in terms of offering investors what they're looking for, that also means you'll have a real business plan with cash flows, specific ROI projections and a true understanding of your market.
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Think of your worst-case financial scenario.
The ideal for securing money is to raise everything in one go, which means you need to be very realistic with your projections.
What, for example, is your worst-case financial scenario? Figure it out and use those numbers for your ask. Many startups don't consider how expensive it can be to get customers, develop marketing and fund working capital. Typically, things take twice as long and cost twice as much as planned.
If you don't like those numbers, see what your numbers look like if you cut your initial sales projections by 50 percent, and double your expenses -- then use that as a base and plug in an additional 30 percent in costs.
It's better to raise more than you need rather than trying to secure a second round of financing later on.
If you want serious investors, be a serious investment.
The real reason people opt for financing from friends and family is because they aren't willing (or able) to do the serious market research and due diligence to see if the business is even viable.
There's very little upside to the friends and family scenario and the payoffs are rarely as big as the downside risks: lost money, hurt feelings, families torn apart and friendships broken forever.
You're always better to go for a private group of investors or a private placement, which will force you to do the hard thinking and heavy lifting on your concept upfront. You'll also see if there is really a market for your idea.
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So what does a winning financing package look like?
Let's take the example of a newly funded franchise business. Say the founders have complete business and marketing plans, a team, concept renderings of the site, samples of materials for the décor, projections for RIO and costs, market research, and a legal overview of the risks of investment.
Are those things a guarantee of success?
Of course not. You could have all of these in place and still not have a winning package. If you're going out to 20 seasoned investors and all 20 say "no," it's time to go back to the drawing board and reassess your concept.
Keep in mind you may have to go through 50 ideas before you find one with a profitable model that gives everyone a return.
That's why 99 percent of companies resort to bootstrapping. It's also why failure rates are so high. Many business ideas are of limited appeal or are going into a mature or already saturated market.
Your best strategy is to use the knowledge, information and numbers you discover in your own research to uncover a unique area or high demand niche you can eventually fill. Not only will you get to a better business idea quicker, you'll also have the data and knowledge needed to show potential funders their investment in your company is money well spent.
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