Businesses need capital, both to get started and to keep afloat. Here are five ways you can organize to get your startup funded, as well as one approach I hope you’ll avoid.
Write a business plan.
Although a plan is not a business, writing one demonstrates a commitment to figuring out your customers, pricing, marketing strategy and distribution. It also shows how well you can tell your story. Investors come to your idea cold – you need to be able to quickly and effectively convince them to pay attention. A good plan helps you do that.
Tie financial projections to operational components.
Revenues should be a function of some explainable assumptions, things that can include the number of customers, the number of products and the average price paid. Costs should reflect your business requirements: headcount; average salary; the number of manufacturing or warehouse facilities; a related portion for overhead. Remember that revenues lag costs, sometimes by more than a year, depending on the business and its growth.
Know the difference between profits and cash.
You can run a business at a loss for a long time, but you can’t operate for ten minutes without cash. Many critical investments – platforms, computer hardware and offices, for example – are amortized over years. Unless you plan to lease (likely at a higher cost), these investments will require more cash upfront.
Understand how much capital you need.
Here, a month-by-month plan tied to operational components can help. Full-year projections might show you have 25 staff at the end of year 1, but your cash requirements differ greatly if you plan to hire them in February rather than November. As above, revenues lag costs. You need enough capital to cover the greatest cumulative shortfall over the course of the period you are looking to fund.
Make the transaction clear.
One you understand how much money you need, you have clearly convey what an investor receives in return. Different funders participate at various stages of your company’s development, so it also makes sense to understand investor strategies before you approach them. Venture-capital and private-equity firms often provide this background on their company sites, but if not, a bit of digging should get you the information you want.
Finally, avoid the “hockey stick” ramp-up. Investors want to see a business grow, and scale can make a difference. But in most cases you won’t do well to plan two or three years of spending before a product comes to market and suddenly explodes. Smaller introductions, ones that test assumptions and earn near-term revenue, give you a chance to prove an idea or pivot in a reasonable time frame.
Most people with good ideas can write a business plan built on realistic operational assumptions. Tools like LivePlan simplify the process, and of course there are consultants (including Magellan) who can help. The plan will help you identify how much capital you need and the offer you’re willing to make to obtain it.