Updated: Nov 23, 2021
In the last decade, as the startup sector boomed across the world; its success has been largely attributed to the amount of capital raised.
The problem with that notion is, the startup environment has hyped raising funds more than the business making revenue itself – to the extent where raising funds alone is considered as a marker for success.
As a result, this has made fundraising seem complicated and worthy of a select few, by intimidating a lot of talented entrepreneurs. The main objective of this blog is to guide you through the process of raising money - right from developing your investors' pitch, to them transferring funds into your bank account.
Assess if you need funding.
Just because you can raise funds, does not mean you should. When you begin your journey as an entrepreneur, it is important to dedicate your time towards developing your product and business model.
The downside to bringing in an investor before you are ready, is that you could end up being burdened with more responsibility than you can handle. If you figure out the why and how of your business, profits are bound to follow - and you will have a better chance at landing a credible investor.
Also read: Does your startup even need funding
Checklist for funding -
As you get ready for your fundraising campaign you must focus on getting these prerequisites in order.
1. Determine your need -
Once you prepare your business plan, you'll get a good idea of the amount of money you will need - so, make an accurate estimate of that and the type of funding you want to seek. While underfunding might leave you struggling to get things done, overfunding can be just as dangerous - because you'll be tempted to tap into the money without an actual requirement.
2. Market research -
To generate revenue through sales, you should know who your customers are, how many of them there are and how much money they're willing to spend on your product/ service.
This will allow you to understand the size of your target audience and how to develop your product based on their needs.
3. Product-market fit -
This is to prove to investors that the market needs your product. If you are creating a brand new product/service, then doing a test run on sales will help you predict future revenue. If you're exploring a market that already has competitors then, focus on developing features that set your product apart.
4. Traction -
After you achieve the right product-market fit, the next step is to bring in customers. You have established how your product is set to disrupt the market, but to get an investment you should show them that you can continue growing at a better rate.
Procedure for raising funds.
Fundraising is a process that requires quite a bit of time to fall into place. To understand that, you must know the various steps along the way before the money hits your bank.
1. Investor pitch deck –
This is going to be one of the most important weapons in your investment arsenal. Your pitch deck will be forwarded across the investors’ network before it hits the mark. So, your deck should be able to hold its ground even if you are not physically there to present it.
A great pitch deck should consist of the problem your product is solving, why investors should give you their money, business model, go-to market, competition (if any) and details about your team.
Also read: The Ultimate Pitch Deck Guide
2. Signing off on term sheet –
Once you have investors onboard, the next step is to sign off on a term sheet. It is a list of terms that both you and your investor have discussed and approved of. It includes information such as how much money is being invested, the equity stake and the role of the investor in your business. Most term sheets have an exclusivity clause which, if signed, prohibits you from negotiating with other potential investors.
3. Due diligence –
Investors conduct extensive financial and legal checks to confirm the legitimacy of your company. You must present all facts regarding your business in the beginning. Any hidden or fabricated truths will be exposed in due diligence and that might rattle your deal with the investors.
4. Shareholders Agreement (SHA) –
Once due diligence is finished and your authenticity has been verified, your investors would like to protect their right as shareholders. This agreement consists of all possible provisions that will shield them from any conflicts in the future.
5. Transfer of funds –
Once all these steps are done and the SHA is signed, funds will be transferred into your bank account soon. You will be required to file with the Registrar of Companies and stay compliant, all the way. This entire process might take a couple of months.
If you are starting out on your journey as an entrepreneur, you should always bear in mind that raising capital is not the only determining aspect for your startup’s success.
There are lots of startups that fail despite having raised millions of rupees in funds. This is an indicator of the fact that there are various factors that contribute to the success of a startup.
However, injecting capital at the right stage of your startup’s development will boost its growth exponentially. You must understand how to spend the money, in the most efficient way. Capital gives you an edge over your competitors and allows you to scale up and secure a huge segment of the market within a short period of time.