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Attracting Investors

How to Crowd-Fund your Start-Up

In her book Cash From the Crowd, Sally Outlaw, founder and CEO of crowd-funding website peerbackers reveals the secrets of funding your business with help from colleagues, peers, family, friends and even perfect strangers.

Sally Outlaw

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Ask for enough money

Many “successful” crowd-funding projects ultimately fail because owners realise that the funding they sought wasn’t enough to cover their expenses. These entrepreneurs may have reached, and even surpassed their goal, but they didn’t anticipate the high costs of creating or shipping their rewards. As a result, they lost money or simply couldn’t complete their reward fulfillment.

When setting your goal, keep in mind that the risk of not being able to deliver to backers is more important than the risk of not hitting your goal.

You’ll need more money than you think to ensure that all the ancillary costs of executing your project are covered. When budgeting for the product you’re trying to create, keep it as simple as possible without losing the usefulness of your idea. You can then add extra features and functionalities via “stretch goals” in your campaign.

Related: How to Raise Money from Family and Friends

Working out what you’ll need

Okay, so there’s some basic math here. You’ll need to determine:

  • Actual, fixed cost of executing your project (whether producing a product, building a website, or renting a store front)
  • Costs of creating your rewards
  • Costs of shipping your rewards. Don’t forget shipping supplies such as padded envelopes, boxes, bubble wrap and tape. Be sure to include an additional shipping fee in your pledge levels for international backers
  • Advertising costs, such as pay-per-click or press release distribution
  • Crowd-funding platform and payment processing fees, which can be 10% or more of your funding. Note that some websites like Indiegogo and RocketHub charge twice as much for campaigns that don’t reach their goals – nine and eight per cent, respectively – as opposed to four per cent if you do. Because the majority of campaigns don’t succeed, you may want to err on the high side when pre-calculating your costs
  • Consider building in the costs of hiring a campaign consultant, a PR company or creatives such as designers and a video producer to help make the strongest presentation possible.

Lay out a spreadsheet in which you calculate the revenues and costs associated with the implementation of your project. You’ll need to break down each reward level you’re offering (perk cost plus shipping), along with the estimated number of each item you anticipate will be supplied (based on the number of people in your network you think will back you at each pledge level), so you can see what your campaign will generate.

Then subtract all your out-of-pocket costs. Will this net amount be enough to execute on your business idea?

Another calculation to compute is the per-day amount you’ll have to raise to reach your goal. If your 30-day goal is R120 000, then you must attract R4 000 a day on average to reach that goal. Ask yourself if you have the network in place to generate this level of support.

If you fear your goal is too large for your network to cover, you can consider raising what you need in phases. You can break down your goal into two funding cycles, for instance, and try running two separate campaigns (with some time in between, of course, not simultaneously).

Although you may not have the intestinal fortitude or time to pursue two campaigns, there may be a benefit in following up a smaller, initial campaign that’s successful with another one rather than running one large campaign that risks not meeting its goal.

Related: Persuade Your Boss to Fund Your Business Idea

Why you shouldn’t set your funding goal too high

There are two problems with setting your funding goal too high:

  • If you’re running a “fixed funding” campaign, in which you don’t receive any money unless you reach your goal, then you risk investing months of work and walking away without any capital.
  • It can turn off backers, as they either sense greed or don’t believe you’ll actually reach the goal (backers like to see that progress bar move and know that they helped get you to the finish line).

Many campaign owners set their goal at the minimum they’ve calculated they’ll need to execute, and then in the text of their project page outline the “stretch goals” mentioned above. This way, they can inform backers of all the wonderful things they can accomplish if they exceed their goal – install a coveted piece of equipment in their food truck, for instance – yet there’s a level of confidence that they can execute without having to reach a huge goal.

Sally Outlaw is the co-founder and CEO of fundraising platform peerbackers.com and crowdfunding-campaign services company Crowdfunding Academy. She is a seasoned entrepreneur who has traveled the globe, including 10 years in Russia, starting and managing several successful companies and running her own media ventures. She's the author of Cash From the Crowd (Entrepreneur Press, 2013).

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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.

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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.

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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.

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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.

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Attracting Investors

If You’re Trying To Raise Money, Doing Any Of These 9 Things May Scare Off Investors

Avoid these mistakes and funding could be yours.

Dave Lavinsky

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Most new and existing businesses can benefit from outside funding. With such funding, they can grow faster, launch new initiatives, gain competitive advantage and make better long-term decisions as they can think beyond short-term issues like making payroll.

Unfortunately, though, most entrepreneurs and business owners make several mistakes that prevent them from raising capital. These mistakes are detailed below. Avoid them and funding could be yours.

Making unrealistic market size claims

Sophisticated investors need to understand how big your relevant market size is and if it’s feasible for you to eventually become a dominant market player.

The key here is “relevant” and not just “market.” For example, if you create a medical device to cure foot pain, while your “market” is the trillion-dollar healthcare market, that is way too broad a definition.

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

Rather, your relevant market can be more narrowly defined as not just the medical devices market but the market for medical devices for foot pain.

In narrowing your scope, you can better determine the actual size of your market.

For instance, you can determine the number of foot pain sufferers each year seeking medical attention and then multiply that by the price they might pay for your device.

Failing to respect your competitors

competitors

Oftentimes companies tell investors they have no competitors. This often scares investors as they think if there are no competitors, a market doesn’t really exist.

Almost every business has either direct or indirect competitors. Direct competitors offer the same product or service to the same customers. Indirect competitors offer a similar product to the same customers, or the same product to different customers.

For example, if you planned to open an Italian restaurant in a town that previously did not have one, you could correctly say that you don’t have any direct competitors. However, indirect competitors would include every other restaurant in town, supermarkets and other venues to purchase food.

Likewise, don’t downplay your competitors. Saying that your competitors are universally terrible is rarely true; there’s always something they’re doing right that’s keeping them in business.

Showing unrealistic financial projections

Businesses take time to grow. Even companies like Facebook and Google, with amazing amounts of funding at their disposal, took years to grow to their current sizes.

It takes time to build a team, improve brand awareness and scale your business. So, don’t expect your company to grow revenues exponentially out of the gate. Likewise, you will incur many expenses while growing your business for which you must account.

As such, when building your financial projections, be sure to use reasonable revenue and cost assumptions. If not, you will frighten investors, or worse yet, raise funding and then fail since you run out of cash.

Related: Top 5 Personality Traits Investors Look For In An Entrepreneur

Presenting investors with a novel – or a napkin

napkin

While investors will want to meet you before funding your business, they will also require a business plan that explains your business opportunity and why it will be successful.

Your business plan should not be a novel; investors don’t have time to wade through 100 pages to learn the keys to your success. Conversely, you can’t adequately answer investors’ key questions on the back of a napkin.

A 15- to 25-page business plan is the optimum length to convey the required information to investors.

Not understanding your metrics

How much does it cost to acquire a customer? What is your expected lifetime customer value?

While sometimes it’s impossible to understand these metrics when you launch your business, you must determine them as soon as possible.

Without these metrics, you won’t know how much money to raise. For instance, if you hope to gain 1,000 customers this year, but don’t know the cost to acquire a customer, you won’t know how much money you need for sales and marketing.

Likewise, understanding your metrics allows you and your team to work more effectively in setting and achieving growth goals.

Acting like know-it-alls

While investors want you to be an expert in your market, they don’t expect you to be an expert in everything. More so, most businesses must adapt to changing market conditions over time, and entrepreneurs who feel they know everything generally don’t fare well.

A good investor has seen many investments fail and others become great successes. Such experiences have made them great advisors. They’ve encountered all types of situations and understand how to navigate them.

If you’re seeking funding, acknowledge such investors’ experiences. Let them know that while you are an expert in your market, you will seek their ideas and advice in marketing, sales, hiring, product development and/or other areas needed to grow your business.

Related: Stand Your Ground When Looking For Investors

Focusing too much on products and product features

When raising funding, you need to show you’re building a great company and not just a great product or service. While a great product or service is often the cornerstone to a great company, without skills like sales, marketing, human resources, operations and financial management, you cannot thrive.

Furthermore, if your product has a great feature, be sure to specify how you will create barriers to entry, such as via patent protection, so competitors can’t simply copy it.

Exaggerating too much

When you exaggerate to investors who know you’re exaggerating, you lose credibility.

One key way to exaggerate is with your financial projections as discussed above. There are many other ways to exaggerate. For instance, saying you have the world’s leading authorities on the XYZ market is great, but only if they really are the world’s leading authorities.

Likewise if you say it would take competitors three years to catch up on your technology, when investors ask others in your industry, they better confirm this time period. If not, your credibility and funding will be lost.

Lacking focus

What do investors care about? They care about getting a return on their investment. As such, anything you say that supports that will be welcomed.

For instance, talk about your great product that has natural barriers to entry. Discuss your management team that is well-qualified to execute on the opportunity.

Talk about strategic partners that will help you generate leads and sales faster.

But, don’t go off on tangents that don’t specifically relate to how you earn investors returns, like the fact that you’re a great tennis player.

Likewise, conveying too many ideas shows you lack focus. For instance, saying you’re going to launch product one next year, and then quickly launch products two, three and four, will frighten investors. Why? Because they’ll want to see product one be a massive success before you even consider launching something new.

Investors have two scarce resources: Their time and their money. Avoid the above mistakes when you spend time with investors, and hopefully they’ll reward you with their money.

This article was originally posted here on Entrepreneur.com.

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