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How To Raise Funds For Your Startup

Fund raising is an important aspect of business & as seen, most do not have should do it right. Here are some tips for you to get it right & stay strong in the fight. Read ON!
A lot of aspiring entrepreneurs have a genuine desire to change the world with their business. Richard Branson said it best with this quote - “The only mission worth pursuing in business is to make people’s lives better”.

Unfortunately, none of these dreams would ever materialize without adequate funds to launch your startup. Investors and lenders seek businesses that are proven, either in idea or execution. If you are new to the startup world, it can often seem impossible to raise your first thousand dollars of capital.

While raising funds can be quite a challenge, it is not really impossible. In this article, we will provide aspiring entrepreneurs with an actionable guide to raise funds to launch their business.

Identify Your Funding Goal

Sure, a million dollars at your disposal would be great. But not all businesses need such high capital to get started. Every dollar raised in funding can affect your profitability one way or the other. Investors seek equity in exchange for capital. Lenders, including banks, demand interest payments. It is hence important to figure the least capital required to launch your business.

The first step in the process is to identify your first milestone. If your business is still in the idea phase, then your first milestone should be to build a prototype for your product. If you already have an MVP (Minimum Viable Product) ready for your business, your objective is to assess customer feedback and demand for your product. Have you been successful in getting customers to pay for this product?

Your funding goal should essentially cover one of these two things - build a prototype and assess demand, or if your product requires a lot of time and money to be built, then you may want to raise capital to keep you going for at least the first six months. In this case, it is a good idea to seek investors (and not lenders) since you are far from making money yet.

Evaluate Funding Options

Ideally, you may want to go down a route where you dilute your equity the least while paying minimum interest on the raised capital. There are two options here - raising funds from friends & family, or crowdfunding.

If your funding goal is just a few thousand dollars, it is highly advisable to seek funds from your family. Crowdfunding services like KickStarter and Indiegogo are wonderful platforms to pre-sell your product and raise several hundreds of thousands of dollars in funds. However, such platforms require the entrepreneur to have a working prototype already. If you are still in the idea phase of your project, this option is not for you; just yet.

Seeking an investor may seem like a risk-free option in the early stages. But if you are venturing into an industry with a proven business model, and also an immediate revenue generation structure, it is a good idea to seek a SBA loan instead. Typically, individuals with good credit score (of at least 680), and sufficient collateral are eligible for SBA loans.

The reason this is recommended over equity-based funding is because investors seek equity in lieu of a share of your business. In the early days of starting up, your business is worth very little which means investors often end up with way more share than their investment is worth. Using an SBA loan to cover your initial phase in such cases can help your business establish yourself. Getting an equity investor in at a later stage would allow you to negotiate better with respect to the equity being handed out.

If you do not qualify for a loan, and do not make any money yet, you may also consider an alternate form of funding called convertible note. In this case, an investor who is excited about your idea hands over their funds with the agreement that their share in the company would be based on the valuation assessed in the next round of funding. This protects your business from giving away too much equity in the initial stages and can expect a fair dilution in the later stages of your business.

Finally, you may also work out a royalty deal with investors where they lend you money in exchange for royalty payment for each product sold. If you go down this route, be careful not to agree to a perpetual royalty since that could end up being costly over the long term.

Seek Investments

Once you have identified your funding goals and the ideal channel for your business, the next step is to go ahead and seek funding. At this point, you may have a priority list of which lenders and investors to seek first and who to talk to next.

In the real world though, it may be tough to move forward linearly. This is for two reasons. Firstly, depending on your burn rate and timeline, you may not have enough time to seek one investor or lender after you talk to another. It is a good idea to reach out to all channels open to you and evaluate options as they become available to you.

In addition to hastening the fund-raising round, it is also beneficial from a leverage point of view. Securing multiple interests gives you the much-needed bargaining chip while talking a deal with a potential investor or lender. Also, it is easier to make a decision on the best path forward when you have multiple options available.

Do however note that windows close really fast in the investment world. So while it is good to have many options, it may also be necessary to close a round fast.

Raising funds for your business is perhaps the most frustrating part of entrepreneurship; at least in the early days. But this is a rite of passage that every entrepreneur goes through. Have you raised funds for your business before? Share your experiences in the comments.

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Any facts, figures or references stated here are made by the author & don't reflect the endorsement of iU at all times unless otherwise drafted by official staff at iU. This article was first published here on 7th January 2019.

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