Raising money to finance your startup is one of the most difficult parts of starting a business. Investors need to firmly believe they are going to get a return on their money and if you fail to raise capital, your business runs out of cash flow and dies. High stakes indeed!
Create A Funding Map
How to raise the money is going to depend very much on how much you need. So the first step in any fundraising endeavour is to create a funding map.
A funding map starts with several progress milestones in your business. For example, the first milestone could be creating a basic working product, the simplest form of your product that can be sold and would be valuable to customers.
The second milestone might be adding some of the bells and whistles you think would be really useful to improve the product and make it a market leader. And so on and so on.
Once you have your milestones, the next step is to figure out exactly how to get from where you are to the first milestone, then from the first milestone to the second and so on. Cost each journey. How much is it going to take?
Don’t be too ambitious with this. Focus on taking money first, then focus on becoming cash flow positive. It also pays to make the first milestone cheap to achieve purely because raising £10,000 is going to be vastly easier than raising £100,000.
Spend some time on this. And allow for contingencies. Things do go wrong and it’s foolish not to accept that within your plan.
First Round Fund Raising
Once you have your funding map, the first step is to raise only the money you need to get from where you are to the first milestone.
Investors will not want to commit a massive amount of money at once. Remember that your startup is competing with other startups for investors’ capital. They may like your idea, but they still need to protect themselves from risk as much as possible. So once they’ve funded your first round, they want to see whether you do what you said you would do.
If you did what you said you would do with their money and got the results you thought you would, by the time you reach your first milestone, your startup is now more credible than it was before. The price of shares will have risen because you are closer to either having a product to sell or being cash flow positive.
If you only need a few thousand pounds to fund your first round, the chances are you can go to friends and family for some of the money. If possible, make sure you sweeten the deal for them by getting your company approved by the Enterprise Investment Scheme or the Seed Enterprise Investment Scheme.
Second Round Funding
Investors coming in at this point have to face less risk than those investing in round one. They will pay a higher price for your shares than the previous investors did.
This stepping stone approach is the basis of how startup funding and investing works. And it’s worth getting serious about this because as the founder or co-founder of a startup, you will be raising money for your company for the first few years of its life.