It is important as a start-up to ask yourself whose money you will use in the process of making your business idea a reality.
Would you fall back on your own nest egg to fund your start-up, this means you have saved up some money over time. It appears not many young entrepreneurs have nest egg to fund their start-up.
Now, will you go the route of debt financing? In other words, will you take out loans and pay them back with interest? This is an option to be considered with great care.
One of the benefits of using your own money is that you retain the profits and all control of your business if it succeeds. Your other option is to seek equity financing from angel investors, venture capitalists and others. In this business model, you owe less money, but you will share the profits with your investors. You are basically trading equity in your company for cash.
Going this route enables you to raise large sums of money for your start-up without going into debt. You will lose a bit of your control, giving your investors a “say” in your company. After all, they do expect a return on their investment. There is a catch.
Intending entrepreneurs brimming with confidence in their business ideas tend to believe all they need to take-off is see capital from venture capitalists. For venture capitalists the story is different because they are aware that nine out every ten start-up fails, they understand that funding is usually not the most important thing to consider when starting a business but structure.
Venture capitalists want clear answers to questions about who the business targets as customers, market size and how the business plans to grow and expand.
David Tele, managing director at Seedstars Academy, a seed capital venture firm at a Career Fair organised by BusinessDay in 2017 said that they evaluate start-ups approaching them for seed capital based on the Content, Process, and Results (CPR) method. The content dimension of the evaluation is data-driven: customer, market size, and projected revenue.
Process entails setting clear specific, measurable, ambitious, and time bound goals. It starts with setting annual goals, broken into monthly goals, then down to weekly and actionable daily goals.
Results comprise outcome from the two preceding phases and the cycle is repeated. Therefore, a start-up needs to do substantial due diligence before it approaches a seed venture capitalist. Below are a few things a start-up must do to attract seed capital.
Have a Business Plan
The first item on your list is to create a business plan. Venture capitalists deem this your most important task because, without a business plan, they are flying blind. You must create a plan that presents your overall business summary and a description of how it will make money.
In addition to your business plan, your investors will appreciate seeing one, three and five year plans. They want to see your goals and strategies for growth. They are looking for your “staying power.”
Conduct Market Research
Your investors want to see your market research. They want validation that the market can sustain your business and that your start-up is viable. This is the “proof” that your business plan is sound and provides you with numbers to back up your claims that your start-up will be successful.
Prepare Financial Models
Venture capitalists and angel investors are smart, and they know how to drill through your materials to the proof that your business can actually make money. Your financial models should include spread sheets of projected costs, acquisitions, sales and revenue, profit margins and growth rates. Bottom line: they want to know when they can start seeing a return on their investment.