Connect with us

Attracting Investors

5 Mistakes to Avoid When Seeking Startup Capital

Give your business idea its best chance to grow without risking your personal finances.

Jonathan Long

Published

on

start-up-capital-mistakes_investors_funding

You could have an incredible idea for a new product, technology or business, but without capital, it will never be more than just an idea. Unless you have access to a pile of money that you have been saving for a rainy day, you have two options: You can attempt to bootstrap your growth or you can raise capital.

I’m a huge fan of bootstrapping, and it can be a viable option if you are extremely cautious when it comes to expenses, if you have a little seed money and if your business concept will generate cash flow early.

If bootstrapping isn’t a good fit, then you need startup capital, which can be secured from several sources. While every funding option has pros and cons, there are certain mistakes you need to make sure you avoid when seeking startup capital, like the five outlined below.

1. Underestimating how much money you need

A lot of entrepreneurs think they will stand a much better chance of securing funding if they ask for a smaller amount, but this approach will crush you one of two ways. First, most investors will see that you have underestimated what it will take to be successful and walk away.

Even if you do secure funding, though, you will eventually run out of money if you requested less than you needed. When you know how much money you need to start your business, you stand a better chance of receiving the capital needed and surviving. Most startups fail, so you need to do everything possible to help increase your chance of survival.

Related: 10 Ways To Beat The Odds And Get That Funding For Your Start-Up

2. Giving up too much equity in the beginning

Investors often want an attractive equity stake in exchange for their startup money, but giving up too much equity in the beginning can be disastrous.

In a perfect world, you would raise enough money in the first investment round to become profitable, eliminating the need to ever have to raise money again. Unfortunately, startups face many unforeseen challenges and obstacles along the way, and you can’t count on the best possible outcome.

That’s why it’s important not to dilute yourself too early. If you have to raise more money down the road, your ownership stake can shrink to virtually nothing. No entrepreneur starts this grueling journey with the goal of being a minority owner in his or her own company.

3. Getting buried in personal credit card debt

Many startup founders use personal credit cards to fund their business, which is one of the most expensive funding options if you have less than stellar credit. Your credit scores typically dictate the annual percentage rate your card issuers give you. Studies have shown that businesses that heavily rely on credit card financing will typically fail.

Racking up personal credit card debt puts you in a very bad position, especially if the business fails. If you have to close the business, you are still left with a mountain of debt on your shoulders that has to be paid back. If you fall behind on payments, your credit score will be destroyed, negatively impacting your personal finances.

Every entrepreneur thinks his or her idea is a winner, and while confidence is great, don’t let it cloud your judgment, especially when it can potentially ruin your personal finances. I hate the thought of racking up credit card debt to start a business just as much as Mark Cuban, who says, “Credit cards are the worst investment . . . unless you pay them off every 30 days. Even then, don’t do it.”

4. Falling for advance fee loans promising funding regardless of credit history

With so many individuals seeking funding to start a business, it should be no surprise that there are criminals trying to take advantage of these entrepreneurial desires. Advance fee loan scams guarantee funding no matter how bad your personal credit history is.

They ask for an upfront fee — often saying it’s for processing — and once you pay the fee, the loan never happens. It’s easy to say, “I’d never fall for that,” but the fact that the Federal Trade Commission (FTC) has a page dedicated to warning consumers about this scam proves it’s a major problem.

If you come across one of these advance fee scams, you can report it to the Better Business Bureau’s Scam Tracker here.

Related: Research-Backed Ways To Impress Anyone In Two Seconds

5. Not having a detailed cash-flow analysis

Anyone who is about to write a check, whether it’s a VC firm or traditional lending institution, is going to want to see that you have a full grip on the cash-flow and more importantly, how you plan on spending their money.

You have to account for every penny that comes in and leaves because most business decisions revolve around cash flow. Poor understanding of your own cash flow can lead to having no available cash for day-to-day operations, which will eventually cause your business to collapse.

Developing a cash-flow analysis shows potential investors you have a firm grip on the operational side of the business. Also, a cash-flow analysis is very hard to fake, letting you know just how great your great idea can be.

This article was originally posted here on Entrepreneur.com.

Jonathan Long is the president and CEO of Market Domination Media, a Miami Beach-based online marketing agency that specializes in content marketing, web design and search engine optimization (SEO). Market Domination Media uses innovative outside-the-box thinking when it comes to developing online-marketing strategies.

Advertisement
Comments

Attracting Investors

The Investor Sourcing Guide

How to attract and obtain investors to your established, high-growth business.

Greg Morris

Published

on

business-investor

As an established, high-growth company, you may find that you need to source capital, identify a mentor, or work closely with other affiliates to prosper. In this case, partnering with an investment holding company can be a valuable growth tool.

So, what should you do if you want to be acquired by a holding company?

Read this.

1. Research everything

If you’re considering a long-term investment partnership, make sure you conduct substantial prior research. There may be many potential investment partners out there, but each has specific venture and industry directives. Get to grips with these.

Related: Is Venture Capital Right For You?

2. Be candid with yourself

The amount of capital that you need will affect which holding company you choose. In particular, you’ll need to understand what your risk profile looks like relative to the returns you expect to provide. This will also help you to source, entice, and keep the attention of the most appropriate partner.

3. Identify your must-haves

Any investment partner you choose is likely to be able to provide you with funding, a broader network, and economies of scale. Beyond these, however, you’ll need to decide on your most important benefits (must-haves), so you can target the companies that can offer you the best fit.

4. Spell out your funding plan

You’ll need to be very clear on how you plan to spend the funding you get from your investor. This plan should stipulate, in particular, how you plan to grow.

Related: 5 Key Questions To Answer For Raising Funding

5. Scrutinise each investor

Make sure to analyse your potential investors’ investment history, so you can get a clear idea of where your interests are aligned. Look specifically at things like:

  1. Where investors’ get their funding
  2. What their investment track record looks like
  3. What their investment directives are
  4. Their appetite for risk
  5. The returns they usually aim for

The crux of the matter

Research is essential, no matter which holding company you hope to be acquired by. This will help you to find, attract and retain an investor who gives you the funding you need, and lends you the support to be innovative, productive, and profitable.

Continue Reading

Attracting Investors

6 Great Tips For A Successful Shark Tank Pitch

Whilst most of us are unlikely to appear on television shows such as Dragons Den or Shark Tank there is a lot we can take out from watching these programmes.

Published

on

shark-tank-south-africa

Whilst most of us are unlikely to appear on television shows such as Dragons Den or Shark Tank there is a lot we can take out from watching these programmes. Entrepreneurs will often need to promote their businesses to prospective customers, lenders, investors, employees and even suppliers.

All stakeholders would like to know with what and whom they are dealing. They will need to assess risk and will try and evaluate the business against others who are competing for those same funds.

1Know Your Product

You should be able to describe your business within 60 seconds, in a confident and positive manner. Let the stakeholder know what particular problem your business solves which makes it viable and attractive.

Your brand and how you intend to develop it is important in determining whether they will invest or lend you money. Share critical information with them such as large customers, patents and trademarks and details of forward orders.

If you are looking for funding or investment, make sure you have the relevant paperwork to back up what you are saying.

Related: 10 Tips From The Dragons Of Dragons’ Den SA

2The Numbers

You must have your numbers at your fingertips.  A true and successful entrepreneur will know his numbers instinctively and be able to recollect and present them convincingly. Stakeholders want to know your turnover (sales) over the last couple of years, your gross profit and net profit.

Investors want to know what they are investing in and whether there is strong potential for their money to grow. Lenders will want to assess their risk — how are you going to repay the money? Moreover, you as the business owner, need to be sure that you will be able to make the required repayments.

You must know what your margin is, as this will largely determine your viability as a business. Margin or gross profit is the difference between the selling price of the goods and their cost and is usually expressed as a percentage.

3Know What You’re Asking For

asking-for-business-funding

Be clear as to the size of the investment you want to give away and how that determines the ‘valuation’ of the business. Therefore, if you wish to raise R200 000 for 10% of the business, that means you value the business at R2m — be sure you can back that up or you will get taken apart.

4Have a Business Plan

The best way to fully understand your business is by way of having a detailed business plan, which has been prepared whilst working through every facet of your business, from the original idea to the finished product.

As the business owner, you need to live this business plan and be able to use it as your daily guide to success. Develop it, change it where circumstances require it, but most importantly know it and understand it.

In this way, you will be able to deal with most of their questions, be they about marketing, research, international expansion etc. It is also a good idea to know your competition and what they are up to.

Related: Dragon’s Den Polo Leteka Gives Her Top Tips To Attract Growth Capital

5Sell Yourself

In most interactions, you the entrepreneur, are selling yourself. Whether it is an investor, lender, customer or prospective employee, it is their impression of you and your capabilities which ultimately determine whether they want to work with you.

Be confident, defend your position where required, as you will need to parry some blows but do not behave arrogantly.

6Learn From Your Mistakes

Many entrepreneurs who have presented to the Shark’s Den and not been able to garner investment have turned their business into great successes. You need to be able to learn from the experience, and if rejected, bounce back even stronger.

Continue Reading

Attracting Investors

3 Things You Must Have In Place To Get That Start-up Bank Finance

If you’re planning to secure funding for your start-up, you need to put the right foundations in place.

Published

on

bank

The South African landscape for raising finance is tough for any business, with stringent lending regulations. Here are three areas to focus on as you set up your start-up to ensure you’ll qualify for a loan or equity funding.

1Securing a Market

Most SMEs I have mentored or advised start with expressing how big the total market size is for their product or service, but, while this is important to understand, the big question is: What percentage of that market will you attract and how?

Look at the ‘how’ first and work your numbers backwards. For example, if you secure a R10 million contract to supply an item that has a market size of R37 billion you are capturing only 0,03% of the market. However, if you’re able to cover your monthly expenses (including your loan repayment) and make a profit, that’s what counts. You should be able to show this contract or letter of intent to procure, which shows how and where you will find this market.

Related: The One Question You Must Be Prepared To Answer When Pitching Investors

2A Strong Team

When you’re starting out you’re likely to be the sum total of your team. If you’re going down the entrepreneurial journey alone, make sure you have identified who will mentor and guide you through the areas you don’t have competencies in and cost this into the business start-up and running costs.

Focus on who in the business is going to:

  1. Sell and market: Do they have the necessary skill, network, product and market knowledge?
  2. Control the money: Are they financially savvy and can they make sure that money is being used for the right things?
  3. Operate: Who has done this before? Can this individual manufacture the product or arrange the supply of goods or services, ensure quality control and sound human resource management?

3Compliance

Formalising your business is costly but necessary. If you don’t have a formal entity, shareholders agreements, loan agreements, financial statements, management accounts, tax compliance and so on, you will come short when looking to raise finance.

Understand these costs upfront and include them into your start-up budget — this will save you a lot of pain in the long run.

Related: 3 Ways For Social Entrepreneurs To Access Fundraising

The truth is that finance is available for women who have the right business ingredients just as much (if not more — in the South African context) as it’s available for men and just as with men. And, resources such as these help to unpack and guide the core fundamentals that are needed to make business bankable/fundable.

Then it’s all about implementation and staying on track to translate all that you’ve done and all that you wish to do in a bankable business plan, and approach the relevant funder for your needs. The right business mentor can certainly help you on that journey.

Continue Reading

Trending

FREE E-BOOK: How to Build an Entrepreneurial Mindset

Sign up now for Entrepreneur's Daily Newsletters to Download​​