Half of the businesses fail within their first 5 years despite making headlines in the beginning. If like us, you think that’s because of an unsustainable or uncalculated long term business plan, we’re all wrong.
According to a report by the US Bank, 82% of businesses fail because of poor cash flow management and 72% fail because they didn’t start with enough money. Acquiring money and managing money are the key factors of a successful business.
Raising money, however, is no easy task. It’s tiring, may take up to 6 months, you lose equity, have to take third-party capitalists in on the decision making and many more undesirable circumstances.
Raising Money Costs a Lot
Opportunity cost is the loss of value or benefit that would be incurred by engaging in that activity, relative to engaging in an alternative activity offering a higher return in value or benefit. Simply put, the money you would have made if chosen one thing over the other.
Raising money is a high opportunity cost as the founders completely indulge most of their time, effort and creative energy to find potential capital sources. This keeps them from product development, expansion, updating through beta testing and all such startup boosting activities they would’ve focussed on if given the time and energy.
Do you really need to raise money right now?
A statement repeatedly quoted by Venture Capitalists is that most startups seeking funds don’t actually need funding at that stage. Sounds weird, more cash never hurt anyone. Well, for startups it can.
Approaching investors before you’re truly ready has disruptive effects on your startup. Two major problems that startups, who seek angel investors too early, face are:
- Premature burnout
- Insurmountable reputational damage
The question arises when to raise money and when to wait? Stay with us to dig deep into the money matters of startups.
Timing is critical
The trajectory of every startup and every sector is different, some may need funding early on others would benefit from funding more at a later stage. The right time to fundraise is one of the most difficult questions for entrepreneurs.
Equity capital is where you raise money in return for shares of your business. If you raise equity capital too early, you’d have to hand over an equity amount you’re supposed to neither want to. On contrary, If you raise capital too late, especially in a competitive and crowded market, you’d lose your first-mover advantage, letting your competitors scale.
The best option in most cases is bootstrapping or raising funds from friends and family. There still are some issues. Many founders don’t have that options. Besides bootstrapping can only take you so high, if you’re a high upfront product you would need funds that too in large amounts early on to launch even.
Signs your startup doesn’t need funding
To make things simpler for you, let’s go through an elimination process. If you’re a founder and see these issues in yourself or your business, it’s a sign to not seek fundraising. Believe us, it’s not the right time and rushing would only bring trouble.
1. Development is not complete
Fundraising will have you recede from focusing on business development for roughly 3 to 9 months. It is a full-time operation so you’d have to strategically plan to raise money at a time your business is in a stable position.
2. Lack consistency and persistence
The rigorous and time-consuming process often becomes overwhelming, thus if you don’t feel ready for the commitment and perseverance required to prepare your pitches and present them over and over again then might as well prepare yourself before seeking funding options.
3. Unsure about your consumer market
Investors will invest in a business having verifiable growth potential. Research is essential here, you must have a vast consumer market willing to spend. Conduct trials and tests and prove through statistics.
4. Focus is growth
This growth stage requires undivided focus and dedication. If you’re growing and have the required resources, it’s better to put off fundraising for now.
5. Negative impact of high valuations
High valuations make it very difficult to actually run a business. High valuation increases expectations that low revenue can’t fulfil thus ending up being damaging for the startup.
Signs your startup is ready for funding
However, if you see the forthcoming signs buckle up for painful pleasure.
1. Proven customer interest
When you’ve seen clear interest in your product or service through testing phases, there’s no harm in reaching out for investments while making the final touches on the prototype.
2. Can sustain for 6 months at most
At a stage where you’re estimated going to run out of cash within 6 months, it is preferred to start seeking funding. Pitching and raising would take a long, start fundraising to avoid falling behind due to budget shortage.
3. Seek Guidance and Support
If your startup is stable and you need mentorship and guidance to expand and grow, who would be a better option than venture capitalists with their expertise in startup financing? Most Investors support their portfolio companies beyond finances.
4. Sales growth
If your startup has made a name, is generating revenue and now you seek funds to grow, this is the Investor’s favourite kind of investment.
5. You lack additional staff to reach next milestones
When you’re sure a team expansion and uplift would help expand regionally or internationally, it’s a good place to seek funds.
6. You have a clear roadmap for the future
A solid well-documented roadmap of future development plans and allocation of investment funds assures a smooth fundraising process.
7. Your business is generating repeat and referral purchases
Word of mouth is the best form of market validation. Repeat and referral purchases confirm the product demand and value. This reputation gives you an upper hand when seeking investments.
Things to do before Fundraising
Once you’re ready in all these aspects get ready for stress, burnout, lots of sleepless nights and overthinking your idea because fundraising is brutal yet unavoidable.
Here is a list of things you should do before going to an Investor.
1. A well-founded well-documented business plan.
2. Prepare a pitch that has a compelling storyline and is easy to replicate so it could be transferred to other investors. Your ultimate success depends on your ability to effectively convey who you are, what you’re doing, where your company stands, where it’s projected to go and why it matters in 30 minutes or less.
3. Convince the capitalists that the problem you’re targeting affects a large consumer market.
4. Traction is proof that somebody wants your product. Prove to your investors that the consumer is willing to pay.
5. Communication with fellow founders to learn from their experiences, get the industry know-how and learn to define milestones.
6. A promising revenue model. The most important and apparent growth metric is revenue, and well, The numbers don’t lie.
7. Seek legal advice and prepare logistically to present your idea from a legal standpoint, cross-reference your product or service with competitors, or apply for patents.
8. Demonstrate all your claims through data, keep your data sorted, and use it to prove your company’s growth and profit potential.
9. To present yourself as self-aware, you must clearly know and show your spending costs, estimated runway, and funding needs.
10. Choose investors wisely, don’t let a large capital incentive lose you too much of your equity or take investors on board that have no experience of your industry.
11. Go for investors in-line with your vision, where you hold power over decisions and can benefit from their diverse experience.
Post Fund Acquisition
The hard part is finally over, you’ve acquired the funds. Let me be lacklustre reminding you it’s not all celebrations but more responsibility.
What you do now, decides where your startup will go. A great many startups raising money, burning cash, not meeting market expectations and failing further validate the importance of this step.
A solid post-funding execution plan with set allocations to deserving departments, having your team on the same page regarding the milestones and the timelines, tracking your spending and progress carefully and primarily avoiding overspending on marketing are a few areas to focus on after acquiring funds.
Pakistan’s Startup Ecosystem
The daily news of startups raising funds has us thinking every startup formed raises funding, which is a ridiculously wrong supposition. Only a minute amount of startups raise venture funding.
As discussed in the article, raising funds at the wrong timing or the wrong way brings no success. An equity round on unfavourable terms or a debt larger than your revenue generation is both dangerous case scenarios.
Detailed planning, meticulous research, a strong commitment to quality products, and careful consideration and understanding of your market are all essential pieces of the fundraising pie.
However, the good news here is that Pakistan is a developing startup ecosystem. This makes the way for newcomers easier, investments are ample and so are the opportunities. It is the perfect time to pitch an innovative idea backed by a competitive passionate team. With the world eying Pakistan’s startup economy, there won’t be a better time to start fundraising.
