As a entrepreneur, you are entitled to feel a sense of pride in “going against the tide” and launching a self-driven, innovation-laden startup. That being said, the fact remains that you really cannot expect your venture to take off unless it is adequately funded. Fundraising is a problem many tech entrepreneurs struggle with when starting out. I have interviewed lots of VCs about fundraising and have written a guide on the topic of how to get funding for your startup. Getting the right advice about fundraising is critical to the success of your tech company.
One reader recently wrote to me to say
I am a frequent reader of your articles on Forbes. In the article about ways to find an investor, you have described the way that actually worked for our startup. We have managed to get the €1 million funding thanks to reaching to potential investors on LinkedIn.”
Consider These Stats:
- About 8 out of 10 entrepreneurs crash within the first 16-18 months of starting their venture, which makes up for 80% of all startups that fail, mainly due to cash paucity.
- Over 50% of small businesses that commenced in 2011 failed within the first four years, and only 3% were able to get into the fifth year.
- Only about 30% of all small businesses can break even while another 30% end up losing money almost continually.
That is only one part of the problem. The bigger challenge for most startups is that it is much harder to get your startup funded than it was in the past, simply because there are far too many startups vying for the much-coveted funding.
Inexorably, investors are setting higher benchmarks for every startup because they want to ensure that their money is parked in a concept that has a promising future.
Many startup founders erroneously opine that they need to raise huge chunks of up-front money to go forward. That is just not true. As an entrepreneur who is competing with thousands of equally (or more) driven startup founders, you need to play your cards right and do different things differently.
Here are 5 tips that could make funding easier for startups:
Be Prepared to Fund Yourself
If you are unwilling to investment your money or resources into your venture, regardless of whether you actually do it, don’t expect investors to put in their money either.
Because they won’t.
Investors are smart people who know what they are doing. They are interested in ensuring whether you know what you’re doing, which is why they tend to prefer entrepreneurs who reflect some confidence with cash and are not content with sweat equity.
Master Your Business Plan
The business plan that you present to investors makes or breaks the deal. Therefore, you may want to go beyond superficialities and make it evident that you know your plan inside out. Not only that; demonstrate that you have chalked out a measurable strategy to accomplish your goals.
Furnish insightful market information about your competitors and target audience while extrapolating on financial metrics and the overall vision of your startup. In case your venture entails launching a product, talk about a specific date by which you intend to launch it.
Going the extra mile while sharing your business plan can make that elusive difference in the end.
Don’t Rule Out Other Sources
These sources of money include RFPs, grants, loan programs, etc. While they are easy to overlook and may not work out for all companies, it is not a good idea to say NO without thinking through it. For example, it makes a lot of sense to seek a federal grant for some industries such as renewable power or biotech.
Moreover, many states are initiating grant programs that offer loans at reasonable interest rates to promising business ideas.
For a startup, every penny counts, literally. Thus, it makes sense to pay while you earn to manage your financial and other resources better. Bootstrapping at every stage to attain a good market validation can make it much easier to raise funds.
Here are some ideas to save costs:
- Defer capital purchases
- Co-locate with other offices
- Use existing equipment like computers
- Sharing office services
- Striking a mutually beneficially deal with suppliers
- Eliminating travel expenses by teleconferencing
- Approaching interns from local business management schools
Networking and More of It
Often, the best mean to get funding or to access people who can help you get the start-up capital is to network. Remember, networking is an ongoing process and MUST NOT stop anytime.
Meet with like-minded professionals on LinkedIn who may want to know more about your startup and take it from there.
Sharing office space with those who can help you connect with investors is another great networking strategy.
Mistakes are inevitable, so don’t be afraid to try out new ideas if you are truly convinced about them. Failures tell you about the things that don’t work for you, so learn from them and move on. The most important part is to believe in your ideas and keep your motivation levels high, no matter what.
An angel investor (also known as a private investor, seed investor or angel funder) is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company. Often, angel investors are found among an entrepreneur’s family and friends. The funds that angel investors provide may be a one-time investment to help the business get off the ground or an ongoing injection to support and carry the company through its difficult early stages.
- An angel investor is usually a high-net-worth individual who funds startups at the early stages, often with their own money.
- Angel investing is often the primary source of funding for many startups who find it more appealing than other, more predatory, forms of funding.
- The support that angel investors provide startups fosters innovation which translates into economic growth.
- These types of investments are risky and usually do not represent more than 10% of the angel investor's portfolio.
Understanding Angel Investors
Angel investors are individuals who seek to invest at the early stages of startups. These types of investments are risky and usually do not represent more than 10% of the angel investor’s portfolio. Most angel investors have excess funds available and are looking for a higher rate of return than those provided by traditional investment opportunities.
Angel investors provide more favorable terms compared to other lenders, since they usually invest in the entrepreneur starting the business rather than the viability of the business. Angel investors are focused on helping startups take their first steps, rather than the possible profit they may get from the business. Essentially, angel investors are the opposite of venture capitalists.
Angel investors are also called informal investors, angel funders, private investors, seed investors or business angels. These are individuals, normally affluent, who inject capital for startups in exchange for ownership equity or convertible debt. Some angel investors invest through crowdfunding platforms online or build angel investor networks to pool capital together.
Origins of Angel Investors
The term "angel" came from the Broadway theater, when wealthy individuals gave money to propel theatrical productions. The term "angel investor" was first used by the University of New Hampshire's William Wetzel, founder of the Center for Venture Research. Wetzel completed a study on how entrepreneurs gathered capital.
Who Can Be an Angel Investor?
Angel investors are normally individuals who have gained “accredited investor” status but this isn’t a prerequisite. The Securities and Exchange Commission (SEC) defines an “accredited investor” as one with a net worth of $1M in assets or more (excluding personal residences), or having earned $200k in income for the previous two years, or having a combined income of $300k for married couples. Conversely, being an accredited investor is not synonymous with being an angel investor.
Essentially these individuals both have the finances and desire to provide funding for startups. This is welcomed by cash-hungry startups who find angel investors to be far more appealing than other, more predatory, forms of funding.
Sources of Funding
Angel investors typically use their own money, unlike venture capitalists who take care of pooled money from many other investors and place them in a strategically managed fund.
Though angel investors usually represent individuals, the entity that actually provides the funds may be a limited liability company (LLC), a business, a trust or an investment fund, among many other kinds of vehicles.
Angel investors who seed startups that fail during their early stages lose their investments completely. This is why professional angel investors look for opportunities for a defined exit strategy, acquisitions or initial public offerings (IPOs).
The effective internal rate of return for a successful portfolio for angel investors is approximately 22%. Though this may look good for investors and seem too expensive for entrepreneurs with early-stage businesses, cheaper sources of financing such as banks are not usually available for such business ventures. This makes angel investments perfect for entrepreneurs who are still financially struggling during the startup phase of their business.
Angel investing has grown over the past few decades as the lure of profitability has allowed it to become a primary source of funding for many startups. This, in turn, has fostered innovation which translates into economic growth.