As much as we'd all like the process of fundraising to an easy one, it unfortunately isn't. You can't expect to just step into an elevator with an investor, give them a three-minute pitch on your exciting new business concept, and then step out with complete financial backing. It simply doesn't work like this. Before you even begin knocking on doors, you need to have a basic understanding of these fundraising principles:
Treat Your Investors Like They Are Customers
One of the common mistakes that entrepreneurs make when they attempt to raise funding for their business is that they treat their investors like banks. Of course, if you're taking out a loan from a bank to help get your business off the ground, that's a different matter. But if you're speaking with angel investors and venture capitalists, then treating them like a bank is a mistake. They're not just going to hand over their money as long as your finances are in order and your business concept is passable.
Instead, you need to treat them like customers. What does this mean? If you're selling a product to a customer, then you need to understand what the customer wants, what they need, and what they are interested in. Your business concept is your product, and you're trying to sell it to your investors. Start by identifying investors who will be interested in your business based on their past investments. Then you need to develop a relationship with them to build trust and respect, just like you would with a customer.
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Have a Refined Value Proposition
A good business idea isn't enough. Anyone can come up with a half-decent idea for a new product or service. You need to come armed with a rock solid value proposition. A value proposition is an explanation of what your business will do, how it will meet the needs of your target audience and how it can benefit your investors.
Have A Budget In Place
Investors are going to want to know how much money you need and what you plan on doing with it. If you don't have a budget in place, they're going to assume you have no idea how much money it actually takes to accomplish what you're setting out to accomplish. They also want to know how you plan on spending their money so they can be assured that they're not just tossing it out into the wind.
Have a Business Plan Ready To Go
Your investors are going to need to see how you plan on executing your business concept. They'll want to know what the short term and long term goals are in addition to how you plan on achieving them and when you plan on achieving them by. If you don't have a business plan, investors will immediately dismiss you as not knowing what you're doing.
Consider All Sources of Fundraising
Identify various fundraising targets and have backup plans in case they don't work out. Angel investors and venture capitalists should be your first target as they are more willing to take risks on smaller investments if you have a strong business concept and plan in place. Other potential sources for startup help include incubators and crowd funding.
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These are the basic fundraising principles that you should keep in mind before you begin going door to door in an attempt to raise funds for your startup.
We found this basic startup cost model template put together by Sunil Rajaraman in order to identify how much money you need to raise for a venture-backed company, and we think it's worth checking out!
(P.S. The "fee" is optional. If you place a zero in the "fair price" section you will still get the spreadsheet, but that is entirely up to you!)