You have a product idea that you’re ecstatic about, and you want to share it with the world. You know that you’ll need funding to make that possible. But you want to make sure you don’t move too quickly. Being ready to ask for funding doesn’t just involve a great product.
VC's want you to be a competitive advantage, generate a lot of revenue, and bring in consistent customers. If you look for funding before you’re ready, you’ll just be wasting a lot of time. So, what qualities does your business need before you ask for funding? Let’s take a look.
Do You Have These Attributes?
- A completed business plan
- Market Research
- Potential customers
- One, three, and five-year business plans
- A goal for the funding
- A financial reporting system
A completed business plan is the foundation of your company. It has an overall summary of how you will make money. This is precisely what investors are looking for you to answer.
A lot of times, startups pitch themselves for funding with projected customers. But a better option that will make more investors interested in you is getting at least a handful of testimonials from your product prototype.
Market research allows you to represent yourself with verifiable data. By having research to back up your claims, it further proves your potential worth to investors. You’ll also be able to show how large your market size is. Investors are much more willing to invest in a company in a large market because the chances of your success are a lot higher.
Having a one, three, and five-year plan shows investors your projected growth. They want to make sure your product won’t fade away overnight. They want it to be a long term solution to a pressing issue.
Having a goal involves knowing how much money you need and exactly how you plan on spending it. Funding should not be used to experiment. It should be used to scale your business. If you don’t have a substantial spending plan, it's not time to ask for funding.
Investors will ask to see statements of cash flow, financial projections, and profit and loss statements. By having a solid financial reporting system and not just an Excel spreadsheet, you will be able to accurately show that your company is growing.
Can You Answer These Questions?
- What do I have to show for the money I’ve already spent?
- What stage is my business in?
- How impressive is my team?
Approaching investors with a high ratio of revenue to cash burn rate will be incredibly impressive. They want to see how you’ve used your money so far because this is the most significant indicator of how you will continue to use the money given to you. For this reason, it’s best to have a track record of how you’ve used money to gain traction.
Knowing which stage your business is in is crucial. Even if you’ve been in business for 20 years, that won’t matter if you’re not in a growth phase. Investors place more importance on growth than years of existence. If you’re in your company's growth phase, then it's an excellent time to seek funding.
But make sure you also have a proven track record of how viable your product is. Essentially, make sure investors know that your business will continue to grow.
If you’re still on the hunt for amazing team members, now is not the time to ask for funding. Investors judge your team as much as they judge your business plan. They know that a team can severely impact the success of a company.
If you’re still in the process of looking, investors won't have an accurate representation of your growth potential since one of the significant factors is missing.
Other Factors Influencing an Investor’s Decision
Other influences on an investor's decision to fund your business are background experience, uniqueness, and ability to handle growth quickly.
Background experience in the industry you’re breaking into builds trust and reliability with the investor. They understand that new entrepreneurs make mistakes, but they don’t want those mistakes made on their hands. More times than not, investors will research your company background. You need to demonstrate your passion and commitment to your brand.
Showing your uniqueness proves to investors that your market potential is worth investing in. By having unique products and services, you’ll stand out amongst your competitors and will be more profitable as all eyes are on you. Investors don’t want to spend their money on products that have been done replicated for years. They know something new and fresh is sure to capture the attention of potential customers.
Being able to handle and manage rapid growth lets investors know two things: your company is profitable, and you will be able to handle even more profitability from development. The more profitable a rapidly growing company is, the more investors are likely to spend their money.
Suppose you have concrete evidence of how unique your product is, extensive background in your industry, and are able to hand rapid growth along with all the other factors previously mentioned. In that case, you're in a good position to ask for funding.
Before asking for funding, it’s vital that you have all the necessary research to back up your claims. You need to have a clear financial plan and a precise plan on where your business is headed. You also need to make sure you have a team of credible and exemplary individuals.
By providing unique products, you are not only serving customers better, but you’re showing that you have a competitive edge in your market. It also indicates that you have a higher growth potential. And if you’ve been growing in your industry with years of experience, you’ll be even more credible.
The best time to ask for funding is when you’re in your business's growth stage and you have a proven track record of your product's success.