The do’s and don’ts of getting investment for your business
Great ideas and excellent business minds are not always enough for a business to succeed. Funding and raising capital from external resources is one of the key aspects of growing your business.
Throughout this article we will be looking deeper into fundraising and the journey of raising capital.
It is important to remember though, that when getting investment for your business, there is no formula to success, only steps you can take to ensure maximum exposure which will in turn increase the chances for the success of your fundraising campaign. It requires commitment and patience. However, there are certainly some tips and tricks you can use to achieve the desired outcome when raising investment funds.
Here are some steps and questions you can use to help with your fundraising journey.
Are you certain you want to raise capital?
We‘re sure you are wondering why we are asking this. The answer is simple. Raising funds is addictive. As soon as the first investment hits your account, your business then gets addicted to it.
Naturally, with a higher cash flow, businesses tend to loosen up and proceed with increasing their expenses by hiring more staff, spending money on unnecessary luxuries and the money’s gone. Therefore you end up in a cycle where once the money has been spent, you end up in a worse position than what you started in, given that you‘ve increased your expenses and therefore you need higher cash flow to fill the holes created.
You‘ll then start thinking and preparing for a round two.
Therefore make sure that before you engage in fundraising you ask yourself:
- Do you really need the money?
- When do you need the money?
Once you‘ve decided to move on with raising investment for your business, you‘ll need to make sure you have a sound plan to convince investors that you are a safe investment. Having a proven business model will make all the difference.
Make sure your business processes are effective and cost sufficient. Some of the best processes and workflows come from the time the business is set up and you have no money yet. That is because during that time you need to be as efficient as possible in the leanest way possible which in the end comes down to your:
- and creativity.
The KEY ingredients to any great company.
Once you‘ve set up your workflows and processes, learned how to manage successfully your funds and made the decision to engage in equity crowdfunding, you’ll need to move on to looking at:
Who to raise funds from?
Entrepreneurs tend to often focus on raising capital for their business from what is called, smart money. Smart money is the type of investment that will open doors, share connections and navigate you through the challenges you might face when expanding into bigger or international markets.
“What’s the problem with that?” You might ask. Investors have their own issues and lives to deal with, therefore set your expectations low. Your investors will be there to support you with cash and moral support, but even the most sophisticated and strategic investors will offer very little in terms of time.
Furthermore there seems to be a misconception that the holy grail of fundraising is VC (Venture Capital ). Whereas venture capital can certainly open doors and securing their investment is sometimes proof that you are on the right track; VC funds come with a number of downsides, especially if you are exclusively raising capital from them.
The most important of them being that, when signing with a VC (or “professional” investor) you are in essence signing a contract through which you are agreeing to sell your business within a predetermined amount of time, whilst at the same time offering them significant control in exchange for their investment. You‘ll also need to make sure you understand that VC’s report to fund investors (called Limited partners), who will expect to receive returns within the lifetime of the fund. That can be translated to a quick and defined exit strategy. Therefore the clock starts ticking as soon you receive the investment.
Of course, that is not always a bad thing, as long as that’s what you want as the founder. Make sure your interests are aligned from day 1.
Another issue commonly overlooked by the majority of businesses is that, if your investment is coming in from only one or two investors you run a big risk.
Often we hear business owners thinking that a small clean cap is what you should be after. But….
Having achieved funding from 2 investors today and fast forwarding 15 years from now, when business is doing well and you‘ve decided to run a round 2 of investment. If your initial investors for whatever personal reasons (unrelated to your business) cannot re-invest.
Moving forward and attempting to source new prospective investors, the first question will be: Why won’t your current investors reinvest? And although there are reasons for their decision, which you‘ll attempt to explain, the potential investor might instantly get a feeling of delegitimization. This will in turn make finding new investors more difficult.
Capital, especially in the beginning, might end up making your business inefficient. The process of building systems and workflows will inevitably teach you how to be resourceful and manage your funds. A skill that will prove useful once investment funds starts flowing in.
Focus on securing investment as efficiently and conveniently via a broad base of investors so you can focus on building an innovative and successful business.