When turning to outside funding, timing is everything. Determine if now is the right time for your startup to seek additional funding.
Eventually, most new businesses have to consider when it’s time to get funded and how to go about doing it.
Many startup founders often assume the course that leads them to VC, but upon further consideration, that option might not be ideal (or feasible).
As a startup founder, I have dealt with that very same dilemma. I thought I was ready to accept funding, but then I realized, the business still needed more fine-tuning and improved financials.
With another business, I took the first offer and then realized that the VC wasn't on the same page about the business and wasn't going to help make the company succeed.
For founders who are considering taking funding, here are a few indications you are ready to take on funding:
When Your Personal Financial Track Record Is Pristine
As a founder, I had to prepare for one of the most important transactions of my life. The funding provided would be more money than I ever personally had.
With that in mind, I wanted to make sure that all my bank statements reflected fiscal responsibility. Since investment firms want to see financial history, I focused on getting my credit rating well above the 700's as well as having a track record to show a consistent payment record.
When You Have Created a Realistic Business Plan With Projections for Major Expansion and Positive ROI
Investors aren’t buying into an idea; they’re buying into a business. This means that I needed to demonstrate that, at the end of the day, I could deliver a return on their investment.
That meant that I had to present a solid, highly detailed business plan that shows how I'm navigating the startup towards greater opportunities. The business plan also had to include an idea of a burn rate, first-year cash requirements, a calculated growth rate and projections for cost scaling. Overall, the biggest thing they want to see is traction and revenue.
Other knowledge that was important to collect before I took funding included information about my target market, consumer habits, what the best marketing and customer acquisition strategy is to tap that market and associated costs. Since we're in the credit card payments space, they wanted to see everything about our customers.
They wanted to know how we got them, how much they were worth and how long they stayed with us. Although a background in operations would have been valuable, I was still able to prepare by knowing my business, inside and out, and better than anyone else. This helped them be much more confident moving forward with us.
When You Have a Solid Team
Investors are looking for companies that have established themselves in some way, and they will factor in current revenue, idea, business plan, and, most importantly, the team into their decision to fund a company. As I quickly learned, VCs aren’t looking for the next big idea; they’re looking for the next big team.
A team is not a group of people thrown together. I built a group that had the talent that fit my company as well as managers with a decent amount of experience in the industry. It took me time to get this part of the funding puzzle done, but it was well worth the effort.
Once they were in place, I knew that the funding I would receive would be handled in an effective way by this talented team.
When You Know Who You’re Dealing With
When it comes to a financial partnership, the investor’s role shouldn’t be diminished. I created a list of investors and organizations I wanted to back my company after spending hours on researching the potential candidates. I based my criteria on what I personally wanted in terms of the degree of investor involvement, experience, compatibility and their vision.
For another founder, their criteria may be different but these factors should still be the framework so you know who you are dealing with in terms of an investor.
To get to know potential investors before taking any funding, I also connected with them through social media, trade blogs, seminars and networking events. Then, I developed a rapport before approaching them for funding.
I also had to have a clear picture of the funding options that were best for the company like whether I wanted to use a form of convertible notes (or other kinds of debt), equity, or mutual funds.
When You Know That There Are No Other Available Options
Before I began looking for funding, I had to be clear on the realities of getting funded. Here are some questions I asked myself:
- Is my company currently generating revenue? If so, can I continue growing my company at the amount that we’re currently making?
- Are there any government grants I can take advantage of?
- How much control over my company do I require?
- Can I afford to fund my company myself by bootstrapping?
- Can I build my company by delaying VC?
Suddenly, landing VC funding can be quite a dramatic change for a company, involving more people in power making important decisions, more equity dilution, a push for exponential growth and the pressure to maximize the rate of return.
Related Article:5 Funding Options For Business Owners With Bad Credit
However, by following my advice based on previous funding experiences, you may have a much better chance at maximizing the potential that comes from that funding.
With a good financial track record, a detailed business plan and road map, a talented team, working knowledge of your potential investors and the type of funding that will serve your business well, you'll have a recipe for a solid foundation for building out your startup that provides success for you and your team as well as the expected return on investment for that investor.