How to Finance a Startup? 7 Tips to Attract Investments
Financing a startup is a decision that many public and private investors take. However, if it is something that is in your business plans, you should be very well prepared in order to get funding.
In this article, you will learn –
- What characteristics those who provide financing for new businesses look for and
- What are the different types of investments.
- Tips to attract investors and different methods to start your business.
How does an investor think when financing a startup?
Knowing the characteristics that attract the attention of those who can finance a startup is essential to know how to prepare for this challenge.
Let’s take a look at some of them:
(1) Verify that your business is investable
This factor is very important, since when someone invests, what they want is to multiply their money. This means that investing in a startup must give it possibilities to scale or grow.
In other words, startup financing must be scalable to raise more capital in the future.
(2) Determine the value of the founding team
When financing a startup, those who know how to do it, evaluate the value of your founding team. For this to be high, you must consider:
- Commitment and dedication to the project
- Previous experience leading teams and demonstrating entrepreneurship
- Knowledge of the market or sector in which you operate
- The team you have and who will be your partners
(3) Measure the level of commitment
To receive good business financing, there must be a high level of commitment on the part of the entrepreneurs. Although the illusion, desire and work are important, the greatest commitment is reflected when placing money.
If you invest your own money, with the purpose of growing your business, you will gain the confidence of investors. By noting that you have used part of the equity you own, it will be easier to finance a startup among third parties.
Types of investments to finance a startup?
Before making financing rounds, you should know the different types of financing for startups.
(1) Business Angels
This type of financing involves private investors, such as entrepreneurs, individuals or executives, who decide on their own, and generally invest both money and knowledge.
When financing a startup, they mainly invest in the initial stages of projects that they know well and have experience in. Some of the advantages of raising capital in this way are:
- They are attracted to the project and the work of the project manager.
- By reputation, some business angels represent a special seal of quality. This is something that may attract the attention of other investors in the future to decide to finance other startups.
- Apart from providing capital, they share their experience in the sector, contacts and more.
However, this virtual or physical business financing also brings some disadvantages as follows:
- Tendency to invest small amounts.
- Tendency to meddle in the decisions that are made if they have a deep knowledge of the sector.
- Limit in the capacity to carry out follow-ons, or invest in future rounds, since they do not have resources from a specific investment fund.
(2) Venture Capital
Consist of firms that specialize in financing startups by investing funds previously obtained from third parties. This is done according to a defined investment policy.
If you wish to obtain venture capital financing, you should consider both its advantages and disadvantages. In the first instance, its advantages are:
- They invest large amounts.
- They have the capacity to provide accompaniment in the future, i.e. follow-ons, and they do so if things go well.
- Not only money is invested, but also reputation and contacts. In addition, they can attract larger investors in future funding rounds for startups.
Now, among the considerations when funding startups with this type of financing are:
- They tend to be strong bargaining and, therefore, the shareholder agreement will have clauses where you will lose some control. Although it sounds bad, consider that this is the way they try to protect the investment.
- Since it is a financing in which a lot of money is invested, the founding team tends to be diluted. That is, you will lose a percentage of the total control of that company, perhaps more than you would like.
- After making the investment in a startup and getting into the business, they tend to be quite disciplined. This is manifested in the monitoring of the business and the control of the most relevant metrics or milestones.
Financing startups through this modality is very popular, since it seeks collective financing through micro-networks of interested investors. In these, a large number of customers or investors finance a product or project.
When seeking funding for startups through these networks, you will find these 2 types:
- Equity crowdfunding: It is based on money that is granted in exchange for a percentage of participation within the business;
- Product crowdfunding: Investment in the acquisition of a good or service.
When applying crowdfunding, you will find the following advantages:
- The valuation becomes the one you want, although the platforms will suggest you some. These will be the ones that fit better according to certain variants.
- The closing times of the financing rounds so that you can count on money can be short.
- It could be considered that this is the best type of financing for entrepreneurs of innovative products.
- There are more and more active platforms where investment is raised for relatively new startups.
However, this model also has some disadvantages:
- It will require your project to be quite eye-catching to the public.
- Some do not tend to provide value beyond capital.
7 Tips to Attract Funding to your Startup?
Now that you know how to finance a startup, and with the purpose of getting an investor to choose your project as the winner, we suggest you follow these tips:
(1) Make a good plan for your business
This tool is basic and it contains the complete approach to your business.
If you want financing for entrepreneurs, it is necessary that you draw up an effective plan that includes a deep market study and preventive figures of expenses and income.
In addition, it must include the possibilities for development and analysis of competitors.
(2) Choose the right financing
When seeking investment for your startup, you should try to get the one that is most appropriate for the business. Examine carefully how a startup is financed in each of the options to which you apply, their policies and prohibitions, and then choose the best options to raise capital easily.
In order to make yourself known and attract attention, apply to contests for entrepreneurs and use digital platforms correctly.
(3) Create marketing strategies
If you are looking to finance your startup as quickly as possible, you have to create strategies to get your name recognized. By doing so through social networks or traditional channels, your business will be positioned and you will build an excellent image.
Getting investment through advertising campaigns and affiliate marketing or other types of marketing will help you reach potential clients and obtain greater profits.
(4) Offer viability with profitability
If your project is viable, benchmarked and solid, even if it is not original, it will attract funding. You have to demonstrate that your business is capable of attracting interest and that there is customer loyalty.
This is one of the steps not only when you are looking to finance your startup, but also when you are looking for financing for any business in general.
(5) Create a persuasive presentation
An excellent way to raise capital has to do with the aesthetics and organization of your presentation, which, in addition to being attractive, should explain very clearly what you want to convey.
Avoid putting too much text, but rather rely on images and explain what the idea of the presentation is. That way, you will have more chances of getting your business funded.
(6) Reflect transparency
Transparency with investors will help you gain their trust and finance your startup in a more effective way. This is a major factor in deciding where to invest capital, as it adds credibility and prestige.
So present your reports and all the information without hiding or falsifying important data. Always keep in mind that you are building your reputation throughout the market and with investors.
(7) Be prepared to overcome objections
In order to get investors to finance your startup, it is advisable to prepare a list of possible objections. Consider carefully the answers you will give when presenting your innovative business ideas.
It would not be a good idea to leave this preparation aside and answer questions randomly or improvised. By showing your confidence, you will build trust and be more likely to receive investment.
Advantages, disadvantages and implications of startup funding
Doing startup funding rounds or seeking startup funding has its pros and cons. Analyzing both sides will help you make a better decision:
Advantages of funding a startup
Basically, the most outstanding benefits of funding a startup are these:
- It has the ability to grow at a faster rate and can generate quick returns.
- Their smaller size structure facilitates a quick response to changes and they are sources of innovation.
Disadvantages of financing a startup
When comparing startup financing with other investment options for starting one’s own business, the following disadvantages stand out:
- It is risky to raise capital with a startup, because they are early stage businesses.
- The work required to raise financing rounds for startups and manage the business in its early stages is very demanding.
- There is a greater likelihood of facing positioning problems in the market due to competition.
- Constant investment is required in order to keep growing.
Undoubtedly, these points against can be an important limitation when setting up a startup, but they are not the only ones, since there are also other implications that you should take into account:
Implications of seeking investment for a startup
One of the main problems associated with seeking funding for startups is the frequency with which it must be done. The essence of a startup is basically to be a growing business.
Therefore, it requires constant reinvestments, especially during the most important phases of the business. Because of this, it will not be enough to raise capital just once, but financing a startup implies a continuous effort.
Hi, I am Nikesh Mehta, owner and writer of this site. I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business.