It’s never easy to start a business. Especially when you sit down and work out the numbers. Finances are (and should be) a primary area of focus before you begin, when you launch, and throughout the lifespan of your company.
But they’re not always fun. If you’ve bootstrapped (started a business with little capital - perhaps just your own savings or borrowed from family and friends), you may reach a point when you start to wonder whether it’s time to seek some additional funding from external sources.
The goal of many bootstrapped startups is to get to the phase where they can attract investors. These investors usually take the form of business angels or venture capitalists, depending on what stage your business has reached.
With the large influx of capital that comes from successfully luring an interested external investor, business potential can increase exponentially. However, there are a few things to take into consideration both before you begin seeking investors, as well as before accepting one.
When to seek funding
As your business continues to grow, it might reach a point where, while you’re generating income, it’s basically covering current costs of operation and production. You also might be one of the few who has cash rolling in.
First of all, give yourself a huge pat on the back because this is a phase that is incredibly difficult to reach. The majority of startups fail within the first two years and many cite lack of funding as the primary reasons.
Most believe that the next step is to seek external funding. There are a couple options: Business angels tend to invest in companies at an earlier stage and invest less than a typical venture capitalist who will contribute considerable funding to companies that are a bit more established.
What to have prepared for potential investors
Not only should you have your business model clearly and thoroughly defined, but you should also to be able to provide a comprehensive business plan and accurate financial records.
Perhaps more importantly, you should be at a point where you have a viable product or service - meaning that your business is providing customers the opportunity to purchase the specific goods or services offered by your company.
Many business angels and venture capitalists also wish to see sales. In other words: proof that there is a demand for your product or service and that people are willing to pay for it.
It’s also important to target investors in your field. Many firms or individuals specialise in a particular area (IT, marketing, design, etc.), so it is best to focus your efforts on firms or individuals with a relevant background.
Is funding all it’s cut out to be?
There are a few things to consider before you begin creating your PowerPoint presentation, writing those emails, and making those phone calls.
The first is that this will take a lot of time and effort. Essentially, you will be taking time away from actually running your business in order to prepare it for presentation to potential investors.
While it can seem like every startup is getting funding these days, many are in fact not successful in attracting interested investors. So if you take the time and effort away from running your business, it’s important to consider the effects should you not find funding.
Business angels and particularly venture capitalists, expect a stake in your business in return for their investment. They often become an active part of the day-to-day running of the business in order to ensure ROI. So take into consideration whether you’re willing to share the reins.
Right for your business?
Receiving financial backing for a business is undoubtedly a massive achievement for entrepreneurs. It is not only the backing of a concept that you created and developed into a successful enterprise, it’s also the means for that concept to continue to grow.
However, it’s important to be able to evaluate whether it’s the right move for you and the right timing. And, depending on the type of investor you’re looking into, it’s also crucial to consider how you’d feel about giving up some of your control.
Bootstrapping is a great way to launch a business and gain recognition for an innovative idea or concept. Backing by a venture capitalist may seem glamorous, but as with all parts of running a business, it’s important to do your research to determine whether it’s right for you.