Great ideas and a bright future – these are what most startup founders present to potential investors.
How hard is it to find investors for a startup, really? Most founders believe in the greatness of their genius and end up disappointed when they do not get the “yes” that they were hoping for. The thing is that investors need a lot more than great ideas. They need plans. They need promise. They need a startup that is already creating income even before its founders approach investors. They need a clear vision of how they can get their investment back, and then some more. Provide these, and a positive response is more certain.
A lot of founders who have tried finding investors before right away usually had a hard time getting a positive response. As startups are risky business ventures, not a lot of people are convinced by a great idea. They would all attest on how it is much easier to find interested investors once there is a high probability of getting an income.
Growth Attracts Investors
Nowadays, startups sprout from just about anywhere. This is why a lot of investors are initially skeptical about making investments in such companies. However, they get interested when they see the startup company’s potential growth. This growth is measured by considering the expected value of the company from future cash flows. This is measured against the current value of a dollar. This is why it is very important for a startup to establish possible income as this will help secure investor funding.
Possible Income is an Integral Part of the startup’s Valuation
One of the biggest questions that potential investors ask is about the startup’s valuation. It includes different things such as assets, value of intellectual properties, principals and employees, early customers, ongoing contracts, discounted cash flows on projection or DCF, discretionary earnings multiple, key assets’ replacement costs, market comparables, and the growth projection from potential sources of income measured with the market size. This is why creating income is very important. It is one of the major ways to increase a startup’s valuation and improve your chances to gain funding.
Lower Risk for Investors
Startups are naturally high risk business ventures. This is one of the main reasons why investors are hard to find for such businesses. Not a lot of investors are big on taking risks. Most investors got funds to invest because they take necessary precautions and were very careful about where they put their money.
There are also some investors who just cannot afford to lose money so they take a lot of time thinking whether to invest on a startup or not. People cannot really blame why potential investors would be skeptical about risking their resources. Although startups make it really big once they make it, a lot more startups fail which means that a lot more investors lose. What usually happens is that their money vanishes with the company.
One way to help them decide favorably for the startups is to present potential income. This will help founders convince investors that there is less risk of losing money and more potential of success for the startup. Most investors would look for something tangible aside from bright ideas. They usually look for prototypes, plans, and possible sources of income.
More investors will be convinces if there is a specific estimated timeframe of the financial activities and when they should expect to get some or all of their investments back. Although no one knows for sure, a small assurance as this one will go a long way in convincing investors. It is best to keep in mind that investors do not just put their money in every startup that asks for their help. They need to see its potential so that they will be motivated to help out. They have to have something to hold on to that would make them believe that a venture will make it big just like Yelp, Twitter, and Facebook.
One good thing to remember is to find potential investors who wouldn’t need their investment back in five to seven years.
Tips for Startup Beginners
Money is very important with startups. Therefore, it is important to save money on operations as much as the company can. Savings is equivalent to money and the bigger the savings is, the bigger the money for more important endeavors is.
- Timing is key: Some startups can be very costly and in some startups it is almost impossible to earn money through it in the early stages. Therefore, founders need to have a steady flow of income so they can pay for the overhead expenses as they wait for the venture to make it big time. During these times, it is logical that they hold on to their regular jobs. Their salaries from these jobs will help them have funds for their expenses. They can work part time on the startup for the meantime. Once the business makes enough, then that is the time to let go of the regular job and focus on it full time.
- Work at home: It is always beneficial to start a startup inside one’s home. This helps a business cut expenses on office space rent and utilities. Although most people would think that it would make a business look unprofessional, it is advantageous for those who are just starting up. A lot of successful startups started this way and even had holiday parties in someone’s living room. Offices are usually held in the founder’s bedroom or the house’s basement.
- Frugal living: It is important to save as much money as one can and have these savings invested to the startup funds. Every way of saving money by cutting on different overhead expenses counts. Small savings from different sources amount to a significant amount of money when put together. Potential opportunities for savings are coffee, meals, heater and air conditioner thermostat, and a lot more. This is another great way to add value to the business venture aside from creating income.
- Plastic is still important: Use credit card if possible. This is perfect for people with great credit standings. This will ensure that the business venture has everything that it could possibly need to make people work efficiently. Through credit card, this is done without large amount of cash outs.
- Don’t be tempted: If you don’t need funding, don’t go looking for it. People give up on large chunks of equity and later regret it, try to avoid this feeling of regret.
Do All Startups Need Income In Order To Raise Funding?
No, some startups build up their valuation by building up user numbers, I am not a fan of thinking how to monetize later, in my opinion you have to be very lucky to develop something and you only begin monetizing it 5-6 years after you started. Not everyone is the next Facebook, WhatsApp or Pinterest. Choose your path wisely, and let your gut feeling lead you, some investors will push you to monetize as soon as possible, some will back you with whatever path you choose.
Did you find this article helpful? Do have some tips of your own to share? Please feel free to drop us a line in the comment section bellow.