Family, friends, and personal funds can only get a startup so far. There will come the point where it’s time to begin the search for startup funding. However, it’s impossible to place a specific number on how many months or years should pass before you start seeking funds from angel investors or venture capitalists.
The time at which entrepreneurs should seek investors is dependent on their ability to demonstrate that their company is worthy of investment. You must show investors exactly how you intend to delegate their funds and what they can expect to receive as a return on their investment. It will take time to build a relationship with investors and prove to them that you are trustworthy.
So rather than trying to tie yourself to an arbitrary timeline, here is precisely what you and your business must have prepared by the time you seek the assistance of investors.
What Factors Prepare Your Business for an Investor?
Whether you are eager to approach angel investors early or still developing a strategy to appeal to venture capitalists, there are a number of metrics they will use to evaluate your business.
The primary difference between angel investors and venture capitalists is that angel investors typically get involved in the early stages of a new business. In addition, the majority of angel investors provide startup funding from their own finances. In contrast, a venture capitalist generally manages funds for a group of limited partners.
Both angel investors and venture capitalists expect a potential investment to prove that your business is capable of earning them a profit. To show possible investors evidence of your company’s value, you must demonstrate the following.
Passion is the foundation of a successful business model. Without passion, the other aspects of your startup are moot. Although passion in and of itself isn’t necessarily going to gain capital, it will give you the strength and drive to pursue investments — and to withstand the rejections you may encounter along the way.
Passion will also shine through to help persuade potential investors to back your company. You must seem assured that your product or service will solve problems in a way that no competitor ever could. If you’re not confident in your business, how can you expect investors to believe they will earn a profit?
Having said this, passion alone does not guarantee that your ideas will interest investors. It is simply the first quality that will help catch their attention and propel your own will to succeed.
Founders cannot simply approach investors with a business plan and a dream and expect them to back a new startup. It is essential that your business has already begun operations and exhibited its ability to sell the product. We refer to this as “proof of concept.”
The traction that your business gains can assist in the process of raising seed capital and attract the attention of venture capital firms. Remember, the goal in business is always to turn a profit. Every business starts with a great idea, but you must provide investors with concrete evidence that an investment in your business is worthwhile.
Significant Market Size
A serious investor thinks about the long term before lending capital to any business, especially one that is up and coming. Your startup must have growth potential. For instance, if your business’ primary market can’t be digitized and doesn’t extend beyond your local area, don’t expect to spark the interest of a significant investor. They will see your business model as inherently limited and lacking room to grow.
Of course, your startup doesn’t need a worldwide market to become successful. But you must be able to reach a substantial enough market that the economies of scale are easy to incorporate into your business model.
Investors may also consider the saturation of similar businesses in your market. As such, your business must demonstrate a competitive advantage and potential to dominate the market.
Ask yourself, what makes your startup unique? It is improbable that you’re the first founder to conceive your business idea, so what will make your business triumph in the face of competitors? Most business owners are not operating in a competitive vacuum, and differentiation becomes a competitive advantage. For example, if your startup is developing a social media app, what will draw people to your app over other existing options? How does the algorithm upon which your social media app operates function differently from others in the marketplace?
In some cases, your startup’s competitive advantage is the location itself. If you live in an area where no one else offers a particular service, then your competitive advantage is a physical location.
Team Members and Delegation
In the beginning stages of your startup, it is natural to have a small staff. In many cases, staffing may be limited to one or two founders. The specific number of staff employed with your business isn’t a primary concern for potential investors. Rather, their priority is whether or not your company has an adequate amount of employees to perform essential tasks. This indicates that you are ready to scale, absorbing any growing pains as your staff rises to meet the increasing demands of your business.
Furthermore, your expanding startup must have operating control. To attract investors, you or your staff must develop operating policies to control the business to attract investors. In addition to this, have you successfully delegated authority to the experts you’ve hired? Knowledgeable investors are interested in startups with teams composed of experts who have power over their area of operation.
No matter how long your company has been in business, you can always expect investors to ask detailed questions about the terms of any investment, including a few basics:
- How much should I invest?
- When will I invest?
- What is the return on investment?
- When will I receive the return on my investment?
You should provide answers to these questions by including an in-depth financial projection. Investors need to see a set of pro forma financials, a return on investment analysis, and a sensitivity analysis around key variables, along with cash sources and uses reports. Prepare these models monthly, and don’t be discouraged if you receive negative cash flow during the first few months. Many businesses begin like this and earn a positive cash flow by the end of the year.
Fahad Alrajhi Group
Investors need more incentive than a good idea to invest in a company. It takes patience and proven results to win over potential investors. Is your business prepared to expand? If you’re seeking venture capital, consider contacting Fahad Alrajhi Group.
Fahad Alrajhi Groups seeks to endorse a culture of entrepreneurship and invest in business ideas that radically impact society while diversifying regional economies. If you have an exciting business in alignment with our values, please contact us today.