What A Startup Need To Look For When Getting Funding And What To Avoid

Startup businesses arise daily with some simply needing a computer and internet connection while others take quite a bit more capital to start off.

Finding funding is going to be a process as there will be plenty of pitching to do as you will not want to work with every possible investor that is interested. You want to have an investor or group of investors that understands the business plan as well as will allow freedom to make decisions for the good of the company rather than short term profits.

The person that the investment is coming from if made public can be a huge deal as well. Certain investors only invest in companies that they are sure will be a success so this can attract quite a bit of attention.

The following are what startups need to do as well as look for when trying to find funding and what to avoid.

 

Understand How Much Funding Is Needed And How Funds Will Be Used

The first thing that has to be done is to get an accurate number on how much funding will be needed. This could really open up options as you might find you need far less money than you thought to make the startup profitable.

Going to investors without a concrete number is dangerous as you might find yourself giving up more stake in the company than you had anticipated. There is also another option that could work in the form of a small business loan as this doesn’t require a startup to give up a percentage of their company. This also eliminates the possibility of an investor that wants to have final approval on decisions although they didn’t invest a huge amount.

 

Angel Investors

Obviously angel investors that are hands off are going to be an ideal candidate to go to for funding. This is not a group of people deciding what to do with a myriad of people’s money but an angel investor is rather a personal investor.

Shark Tank is a perfect example of these types of investors as they are going to take ownership of a certain amount of the startup. Often times partnering with an angel investor that can help develop the business through their existing relationships can be extremely beneficial to a startup.

A person that has a shipping fleet could be a perfect fit for a startup looking to do very well in the ecommerce space. Usually it takes $200,000 in investment to be considered an angel investor but a personal investor could be any amount of money in exchange for equity in a company.

 

High Interest Business Loans

The last thing that you want to do is to take out a high interest business loan as it will eat away at profits. For a company needing money that is not yet profitable this can dig a financial hole that even successful companies might not be able to get out of. For those companies that are looking to increase cash flow with money coming in this can be an option.

Companies that are waiting for money from clients can take part in something called factoring where a third party gives the company money for what is owed. The one issue with this is it does require giving a discount on the bill to the third party providing cash. This does not make the factoring company responsible for collecting the money as it is often called invoice financing as you are borrowing against the invoice.

 

Venture Capitalists

Venture capitalists operate a fund that incorporates a myriad of people’s money and invest it in businesses that they see fit. Generalist VCs usually invest in a variety of industries and invest in businesses they think will be profitable long term regardless of niche. Specialist VCs tend to stick to one niche and invest in multiple related niches as well. VC deals according to Lee Jacobs can win deals in a variety of industries for quite a few reasons.

One being that generalist VCs can help form mutually beneficial relationships between unrelated businesses they have invested in. A digital marketing company could help a sales optimization company and vice versa as all businesses need both sales as well as a good online marketing plan.

 

Investors That Want To Be Too Controlling/Involved In Everyday Operations

The nightmare of many of those people needing funding for their startup is that of an investor that wants to be overly involved. This can include second guessing your decisions as a founder or even disagreeing with you in front of your staff.

Expectations need to be set before accepting an investment as you do not need a person thinking they have all of the answer just due to them investing some money. While you will have to listen to investors to a point, there is no reason for them to come into the office daily to talk about ideas they may have had overnight.

Finding funding is going to be a stressful period but with the right investor a lot of financial and personal stress will be lifted off of you as well as your startup. Take the time to target investors now to get the ball rolling!

 

This is a guest contribution by Charles Dearing.