Fundamentals first

More often than not, the first comment from a Founder/ entrepreneur who has asked to have a chat is “we just need $X to get underway” (X can equal anything from $100k to $1m), and that they just have to be introduced to someone who will magically provide this money. As we talk a little more to find out how prepared they are for the funds to go into their venture, it usually becomes apparent pretty quickly why they haven’t already attracted the funds, so we change the conversation to talk more about what needs to be thought about for them to build a solid and scaleable business.

Sometimes considerable funds of the Founder’s, and others, may have already been invested, and so we then spend some time discussing how they are the first investors in this venture, and so they will still need to make sure the fundamentals are right, for them (and others) to keep investing in this particular venture.

After working out together where some of the most apparent gaps are, it’s important the Founder understands that any investor will require these gaps addressed first, in some way, before they will look at your venture more seriously. Part of the reason why securing private investment can take 6-12 months is that the company is trying to play catchup and get the gaps addressed during that process. Having the gaps addressed up front can shorten the process. What I’ve seen is Founders who focus on getting the fundamentals right for building a global, scaleable business, start to attract investment interest. Believing this can be quite a leap of faith for some Founders.

Investment second

Once the Founder is focused on getting the fundamentals right for the business, the potential sources of funding appropriate for the business and the defined strategy start to  come into focus. Here’s a short summary of the range of potential sources of funding for a startup:

Sales – sales are the cheapest and easiest source of capital for a company, and if the venture is in a position to drive sales, it’s worth checking this out first. While driving sales, keep in mind your cashflows and customer service. In NZ, if you have possible export sales already lined up, it’s worth checking out how the NZ Export Credit Office can assist.

Debt – money is cheap at the moment (i.e. interest rates are low) so if you have strong growth plans and solid financials/ cashflows and/or secured sales orders, it’s worth talking with your bank about a working capital facility or other loan options. The bank will have obligations against these funds so make sure you understand them.

Grants & Awards – there are numerous grants available for different sectors and companies at different stages. There are also grants available for individuals or specific projects, so make sure you check them out too. Some will be 100% funding and some will require the organisation to match or contribute some funds. Successfully securing a grant or award can quickly raise your venture’s profile, but also has obligations, usually around reporting and public disclosures; make sure you understand them.

Corporate Partner – attracting the attention of a corporate could provide early-stage funding, access to resources, and channels to market for your venture.

Equity – someone investing in your business for equity (shares) is the most expensive form of capital available, and it’s important you understand the implications of this type of investment. The different equity investment contributions can be either effort & resources and/or funds from:

  • Founders  
  • Other team members  
  • Friends, family and fools (the 3Fs)  
  • High net worth individuals  
  • Individual Angel investors  
  • Formal Angel investor groups  
  • Early-stage venture firms  
  • Corporate partners  
  • Incubation and acceleration programmes

Crowdfunding – crowdfunding is about the public (the crowd) providing funds for either a product (where they pre-purchase the product), or equity (where they buy into the venture directly). If you are exploring this option, there are a range of platforms available both locally and internationally, so it’s worth having a good look at what works and what doesn’t for each of them. They can be a good way to raise profile and drive sales if you are already in market. Running a crowdfunding campaign, as with most of these activities, can be very time intensive.

The key takeaway to attract funding for a startup is to get your business fundamentals in place, and keep in mind that any form of funding has obligations so it’s always good to check out the pluses and minuses associated with each of them and be very sure you understand what those obligations are, as well as the consequences if it doesn’t work out as anticipated.

– Dr. Claire McGowan | CEO for SODA Inc.

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