The issue of raising funds will always be a sensitive topic to founders and entrepreneurs, because of how important the funds are to the business and how hard it is to get to investors to release their money. Point is, even though people are eager to invest in promising business ventures, no one wants to put funds into a business that might turn out to be a sinking ship.
This means that if you hope to secure any funding, you must convincingly establish that you need the funds, that you deserve it and that you will use it judiciously. Importantly too, there should be convincing evidence that the business will survive, thrive and give the investors good returns in record time.
Here’s some of the first steps you should take before you approach any investor to back your business idea with his or her funds.
Before meeting any institution or person for funding, try self-funding. There is an extra layer of confidence that comes with knowing that the entrepreneur has started the ball rolling with his own funds. It is the first sign that the entrepreneur trusts in his business idea and has committed his time and money to it already.
Establish business viability
How viable is the business you are seeking funding for? Is it a seasonal business? Will it remain viable for the next few years? This is particularly one of the reasons why banks turn down loan requests. For instance, coronavirus pandemic became an issue from Q2 2020 and there were so many temporary business ideas that sprung up and made some good money. For instance, products like nose masks, hand and surface sanitisers, were in high-demand. Some people started a business off this demand, and their businesses were good (they even got sufficient cashflow to show). But in the long-term, how viable were those businesses? Do you think any bank would have offered a loan for this purpose, knowing that it may no longer be viable in the next decade?
Your business idea may be good for now, the next 6 months, the next 18 months etc. But if you are going to approach anyone to put in their funds, you should establish that the business is indeed viable.
Have evidence of cashflow
If you want to secure funding when you apply for it, then first establish cashflow. Cashflow refers to the amount of money going in as revenue and out of the business as expenses. Until you start making sales, you do not have cashflow. You just have expenses. Going in search of funding when you only have expenses without revenue is a risk. It will take more than a well-prepared pitch to convince an investor or a financial institution to release funds to a business with zero revenue.
If you have expenses higher than revenue (meaning you are not yet profitable), an investor can take the risk of funding you in the hopes that the economies of scale will play in your favour as you grow. But to have no revenue at all, does not say well about the business.
Have a plan detailing your projections and predictions
Once you have decided that you need external funding, detail how you want to spend the money and make your projections. Is the money going to cover all of your running costs for 9 months until you start bringing in a revenue from new customers? Is the fund going to be used to procure equipment? How will the new equipment affect your output and income? How and when do you intend to pay it back? (Unless it is a grant).
Work out the terms
If you are seeking funds in loans, what you need to work out is your repayment plan. But if you are seeking angel investors, venture capital or any other friendly investor, you need to sit with a corporate lawyer and discuss the terms and conditions for the investment. Are you giving up some equity in exchange for the funds? When can the investors liquidate and pull out their funds? Is it going to become a partnership with your investor as the financial partner and you as managing partner? Sort it all out in time.
Do your due diligence Review
The would-be investors are likely to do a background check on your management or leadership team, your market potential, your products and services, corporate governance documents, and financial statements. You take the first step and sort it all out before you go seek funds. Make sure that when they come searchn