The most important step in scaling your business is acquiring outside funding. While newer and friendlier ways of financing are opening up, competition among fund seekers is also increasing exponentially. Let me be very categorical here, investors, be it a bank or a private investment house such as venture capitalists or angel investors, are active in the investment business. It has become almost impossible to raise funds yourself for the idea alone. Many factors play a role before a successful investment contract is concluded.
Not all ventures qualify for all types of investors. Your business plan and financial projections, and of course your implementation process, play an important role in identifying the right investors. However, if you are looking to develop a cloud application, rest assured that knocking on bank financing is just a huge waste of time. The investment business depends on four factors: required capital, return on investment, scalability and the associated risk.
So if you are planning on reaching out to an investor, you shouldn’t make an extraordinary business plan. Invest in the planning phase, understand the risks and opportunities of your business and be ready to answer any questions you may have to underpin your business model. If necessary, seek the help of professional counselors such as Burasa. Having someone on the team to guide you through the process can save you time and get it right the first time.
Let’s take a look at the different sources of funding available and how you should tailor your business plan to suit different investor communities:
Gone are the days when you could count on funding based on your idea or concept. All startups must first perform a bootstrap. Bootstrapping means starting with limited resources, ideally raised by your own savings, family and friends. The efficiency of your resource use is your key. When introducing your idea to your close contacts to raise funds, your plan needs to explain the idea, the risks, and also the financial plan of how and when you plan to return the funds. Your business model, strategies and overall business plan should be geared towards the organic approach and minimal expenditure.
Angels invest in your business instead of equity. The capital requirement is typically up to 2 million and you expect a 10 to 20 fold return over a period of 5 to 7 years. There are two types of fishing finance. The more popular type is where the angel seeks an exit either through a management buyout or a dilution in the future funding round. The other way, which is rare, the angels work as active partners with you in the venture. The angel-focused business plan must include research to underpin your endeavors and clearly define long-term financial goals.
Similar to the angels, but focused on bigger deals. Scalability is the key. The funding phase also plays an important role. The expected equity dilution for a seed phase would be much higher than for an early phase. VCs usually aim to have a portfolio of ventures, and every VC company has its sweet spot for investing. You need to research your investor in detail before contacting them and tweak your business plan to make sure it matches what they are looking for. Reviews are an important part of VC funding, so your business plan needs to support the reviews, not just guesswork. Your business plan should also clearly visualize your scale-up process along with future funding needs.