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By Daniel Bailey
For the Financial Independence Hub
Launching a startup is a daunting challenge. Not only do you need to have an innovative idea for a product or service, but you need to secure funding to support the company until it begins to turn a profit. There are many options for funding and you may try to obtain a bank loan, angel investor or venture capitalist to help your business thrive. In many cases, a venture capitalist will be the most beneficial as you can receive managerial and technical advice in addition to financial assistance. Venture capital is not the right solution for every startup, however, so make sure you can answer these five questions to determine if it is the best option for your business.
Do you have a Prototype or Business Model ready?
It is not enough to simply have an idea for a great new product if you want to attract investors. You need to have a prototype to showcase during your pitches for financial assistance. Not only just you have a working prototype, but it needs to be refined so investors can see that you have already assessed it and accounted for minor problems in the design. Your final prototype will likely look much different than the initial one, so it is crucial to have performed the necessary construction and made changes before approaching potential investors. If you do not have a prototype or a solid business model in place, your company is not ready for the growth a venture capitalist usually brings.
Is it the right time to seek an investor?
Seeking an investor out immediately after you have an idea for a new business is a mistake. If you want your company to be successful, you must perform a few critical steps before searching for an investor, especially if you intend to seek out a venture capitalist. Venture capitalists such as Mark Stevens, the managing partner of S-Cubed Capital, look for startups with limited revenue and potential for explosive growth. You should work to get your company’s name out to customers so you can build a solid customer base and establish a solid projection for future profits so you can meet these criteria and attract investors.
Are you willing to share equity in your company?
Unlike traditional bank loans or angel investors that simply offer financial backing, venture capitalists often take a stake in the company’s equity in exchange for their expertise. T
his is uncomfortable for many entrepreneurs who wish to retain complete control of their new businesses, so you need to be prepared to offer an equity stake if you want to secure venture capital to grow your company quickly. This means you will share ownership of the company and will not have complete control over decisions about its vision or future. The business may stray far from your initial vision for it, so if you are uncomfortable with this possibility, venture capitalism may not be the right option for you.
Can you keep your Burn Rate low?
Dozens of startups are launched every month and the sad reality is that the vast majority of them fail within their first year. Only a select few startups achieve long-term success because many squander the money they receive from investors or make the mistake of asking for too much money upfront. Before you craft your pitch to attract venture capitalists, make sure you crunch numbers and have a solid, effective plan for how you will use the money once it is received. Create a budget so you aren’t tempted to spend all of the financing on advertising or inventory.
If you don’t have a budget in place, you may quickly find yourself running out of money with little to show for it. This requires you to continuously obtain additional funding, and venture capitalists are not likely to supply you with more cash if they feel like you are mishandling it. You will be better off securing a small amount of financing to prove to investors that the money will be used responsibly and then ask for more as the company takes off. Keep your burn rate, the speed at which you spend financing, as low as possible so you do not deter investors
Are you interested in Financial Stability or Quick Growth?
Venture capitalists typically cause tremendous growth in the companies they back, but their primary focus is financial stability. They want the businesses they fund to grow quickly so they receive a significant return on their investments. If you are simply interested in one aspect or another, venture capitalism is not the right solution. This type of financing allows for exponential growth so you can see incredible success quickly, but if you do not continue to use your funding wisely, the company will not succeed long term because it is not financially stable. Venture capitalists are wonderful assets for startups, but you must be able to answer all of these questions to know if this is the right type of investor for you.
Daniel Bailey is a full time blogger and part time marketer. He currently contributes articles here at Findependencehub in building wealth and business growth ideas. When not working, Dan loves to paint.