Starting your small business can be an adventurous and opportunistic time in your career. However, it can also be quite a challenge if you haven’t handled large sums of money before. Even though your small business may have the right leadership, business strategy, and internal support, the risk of starting a new business is high.
One way to build your business capital is through fundraising opportunities. However, finding stable investors with the revenue to commit takes time and resources. To ensure that you can gain as much fundraising capital as possible, you’ll need to avoid some of the common pitfalls.
1. Know Your Fundraising Needs
First thing’s first; you should know how much fundraising capital you will need to raise. Make a list of necessary operating costs like employee salaries, web hosting, supplies, and product designs. This should all be detailed in your long-term business strategy, so you know how much money you’ll be spending in the present and the future. A thorough business plan allows investors to understand that you’ve thoughtfully identified the risks and critically researched the steps required to break even and generate revenue. If you want to solicit investors, it’s necessary to lay out a plan that examines and quantifies the capital you’ll be likely to gain.
Create a business strategy to:
- Assess markets and competitors
- Gain insight on capital you need
- Avoid costly mistakes
Best Advice: Plan a clear budget and ensure the ability for deficit spending. Potential investors critique entrepreneurs on the effectiveness and completeness of their budgets and business plans. They want to know precisely how their money will be used. In addition, focus on milestones and results when presenting your business plan to investors. Talk about what the money will accomplish rather than merely operation costs or how long the desired capital will last.
Best to Avoid: Don’t underestimate your expenses. When setting a fundraising goal, keep in mind that it normally takes more than double the time to achieve the conservative estimate of your revenue goals that are outlined in your financial model. Costs usually run high so plan your budget for extra costs of up to 25%.
2. Know Your Company’s Valuation
Part of knowing how to start your business is to first know how to correctly assess your company’s valuation. Your company’s value is essential for determining the cost of new capital while you seek equity additions to your current capital plan. Business owners need to understand concepts of discounted cash flow and market multiples before negotiating value.
As you evaluate your company’s worth, consider these questions:
- How much is the company worth now?
- How much will it be worth it the future?
- What is the estimated time range to create future value?
Your next steps are to:
- Use the correct valuation multiples to estimate business worth. If done incorrectly, this is one of the reasons business valuations fail. Remember: if the valuation multiple you’re calculating is based on the business’ net cash flow, then do not apply it to the net profit!
- Include key assets and liabilities in your calculations
- Conduct a company-specific risk assessment. Your discount and cap rates will be unique according to your company’s financial and operational expenses.
Best Advice: Make sure to assess the correct type of value for your small business. You can lower your price if you’re a new entrepreneur or haven’t yet released your product. Four types of assessments can be utilized for this purpose: The Venture Capital Method, the Dave Berkus method, the Scorecard method, and the Risk Factor Summation method. By using multiple rational valuation methodologies, you can average multiple methods, after eliminating outliers, to find a final pre-money valuation. If investors offer a term sheet with a higher valuation, you can either take the risk or pass on the deal.
If you’re still having trouble, let a lead investor help set the price for you. Once you gain more experience, you‘ll learn and research more about the market and can assess and demand a higher rate.
Best to Avoid: Many mistakes can be made when valuing your business. Avoid choosing the wrong type of value and assessing value via net profits over cash flow.
3. Create An Effective Fundraising Team
Fundraising strategy requires an expert team. Recruit team members with standout skills and utilize them in specific roles.
Positions that are vital to the fundraising team include:
- Engagement and press officers: Professionals who engage, communicate, and foster relationships with investors, customers, and stakeholders.
- Marketing and networking gurus: Individuals who can maximize networks and make crucial introductions between the business and investors.
- Negotiators: Professionals who can strategically and timely ask for the investment.
- Brand ambassadors: Officials who represent the business in a positive light, communicate with ongoing investors, and promote healthy relationships with customers.
Best Advice: Recruit team members who already have investor networks. Hire people who are great at building relationships. The best entrepreneur and investor relationships are friendships bound by shared values and passions.
Best to Avoid: Don’t hire people who have no experience pursuing outreach and setting up meetings with investors. Infrequent meetings with investors may drag out the decision process for them and distract you from creating a quality product.
4. Determine Your Fundraising Audience
Attracting target fundraising audiences is key to successful investments. It’s important to match your product’s target audience with similar investors. Determine what your desired audience(s) want from your product.
- What is the desire of your audience?
- What demographic groups are most likely to respond to your product/mission?
- What challenges does your audience have?
- How do they think?
- How does your product help or solve the problems of your audience?
- What makes your audiences’ driving decisions?
Best Advice: Know your audience. When engaging with investors, you don’t have to simply ask donors to write you a check. Instead, you can ask them to pledge support in small amounts over a period of time. Also, consider asking investors to provide a “matching gift” which allows you to take initiative.
Best to Avoid:
- Beating around the bush - Once you’ve established relationships, ask directly for the amount you need.
- Asking for insufficient amounts or unreasonably high funding - Carefully consider the donation amount each audience can afford. Always suggest at least one donation amount in your proposal.
- Focus on style and substance - Ensure your key message is clear and readable by all Your appeal should connect directly to the fundraising proposition and issue a need for stronger support
- Don’t ignore individual donors - These are crucial benefactors whom your business may continue to utilize in other ways.
Like most new entrepreneurs, there will be hurdles to face as you learn the ropes. However, pursuing your passion as a career can be worth it in the end. The right amount of training, focus, and preparation can help you effectively raise the capital needed for your business venture while building sustainable, long-lasting relationships.