An idea, check. People who support your idea, check. A competent team, check. But funds?
Every business starts with an idea but gets stuck in raising funds. As an entrepreneur and founder of a startup, the fund is of optimum importance for your business – whether it is to set up a business or to accelerate business growth. However, in recent years, there has been a shift in the fundraising scenario.
Today, you’ll find industry-focused investors ready to fund niche category startups. Additionally, large corporates now realise the importance of investing in startups with several examples of companies raising funds in the seed round itself. All those who have raised funds for their company agree to the fact that finding the right investors is one of the biggest challenges they’ve faced. Not only do founders have to gain the confidence of investors, but also have to compete against other companies.
Mentioned below are some of the most common challenges founders face when raising funds for their startups.
Identifying The Funding Your Business Needs
Before raising funds for your company, it is essential to understand what kind of funding best suits your business. As an entrepreneur, you need to decide whether to take a loan or seek potential investors for your business. A business can raise two forms of funding — equity funding and debt funding.
The Fundamental Differences Between Equity Funding And Debt Funding
Debt Funding: The process of borrowing loans from banks, financial institutions or lenders at a stipulated rate of interest until the repayment of the amount is debt funding. There are two types of debt funding in India are — secured and unsecured debt funding.
- Secured funding requires a business to offer some form of collateral to assure the repayment of the loan.
- Whereas, unsecured debt funding doesn’t require a business to pledge collateral to get money. The loan is sanctioned to the company based on its credit history, balance sheet, revenue, profit, and more. Funds are provided for a shorter period of time and come at an exorbitantly high rate of interest.
Equity Funding: In case of equity funds, a company raises funds from angel investors or venture capitalists by selling a part of its shares and ownership rights. These shares include equity shares, preferred stocks, convertible stocks, and all other relative equity instruments.
Mezzanine Financing: A business can also opt for a combination of equity and debt funding based on its requirements. The drawback of mezzanine loans is that it commands significantly higher interest rates, typically within the range of 20% – 30%.
|A portion of the business is given up||The investor will not have a stake in the business|
|No monthly interest or payment is charged||Interest has to be paid every month for a pre-determined period of time.|
|Advisable for seed funding||Advisable to cover the operational needs of the business|
|Profits have to be shared with the shareholders||Profits would remain within the company|
|Investors become a part of your business, hence investor approval is required for any decision-making.||Completion of the repayment against the loan marks the end of the relation|
Finding The Right Investors
Once a business has finalised the kind of funding it requires, it is then essential to find the right investors. As an entrepreneur, it is crucial to assess which investor will support your business ideas, and at the same time, trust your potential. Every investor has different requirements and a preferred sector when funding a company, and therefore the founder needs to do homework on the potential investors.
Networking is the key to financing a startup. Building relationships with probable investors and other companies are considered essential in growing and expanding your business. Although it can prove to be a challenge for many, there are numerous strategies to develop a robust and functional business network. It is essential to understand that rejection is an integral part of fundraising. Hence, networking with potential investors to increase the odds of getting funds is considered imperative.
The process of raising fund is long and tedious, where a founder has to present the idea multiple times to potential investors. It can take from 6 months to 2 years, depending on the nature of the work, kind of investors, durations of the funds to hit the bank account, market conditions, and so on. Always remember raising funds isn’t an easy process, but being patient is the key to reap its benefits.
Many entrepreneurs have the misconception that the investor presentation should contain all the details with the required supporting data of the company. However, a sloppy PPT may adversely affect your business, as the investor may lose interest. Whereas, a crisp, precise, and impactful PPT will keep the investor engaged and help in fundraising.
Remember that the concept of the business is the deciding-factor for investor’s interest. In case an investor finds your presentation interesting, he/she will ask for a much more thorough presentation in the next meeting. Do keep in mind, facts and numbers are helpful only when the interest in the investor is instilled. Before that, they are just random figures to the investor.
Trust Your Ideas
Rejections are a part of the fundraising process. So, don’t get dejected by it, instead, trust your idea.
As a founder, you will come across investors who may not agree with your idea or even if they like it, they might choose to fund someone else. In such a situation, not losing hope, keeping patience, and trusting your ideas is of utmost importance. Sooner or later, you will come across the right investors for your product or service.
The Bottom Line
Raising funds for startups and fulfill the working capital needs can be an intimidating task. But utilising basic fundraising strategies can help in overcoming the challenges.
For any new business, it is advisable to approach investors about six months before the anticipated date of running into financial trouble. In the meantime, explore alternative options like invoice discounting to raise working capital and accelerate business growth.
Being prepared with all the essential information can substantially increase your chances of raising capital for your company. Keep in mind that “The best preparation for tomorrow is doing your best today.”