Starting a new business in today’s competitive market might require a significant amount of funds.
While there are many bootstrapped success stories like Zerodha and Zoho, there are countless other startups that rely on external funding to scale their operations.
In this article, we will share a step-by-step process for raising funds for your startup needs. We will cover everything from the pros and cons of raising external funds to the options that are available in the market.
Pros and Cons of Raising Funds
Before we go into the steps to raise funding, it’s important to understand the advantages and disadvantages that come with raising funds.
Let’s take a closer look at the pros and cons:
|Pros of Raising Funds||Cons of Raising Funds|
|1. Accelerated Growth: With sufficient funding, your startup can grow faster and gain a competitive edge.||1. Loss of Equity: By bringing in external investors, you dilute your ownership stake in the company.|
|2. Access to Expertise: Investors often bring valuable industry knowledge and connections to the table.||2. Pressure to Perform: External investors expect a return on their investment, which can lead to performance pressure.|
|3. Scale Operations: Funding allows you to expand your team, reach new markets through marketing, and develop new products or services.||3. Time-Consuming Process: Preparing for and securing funding can be time-consuming which might divert your attention from your core business.|
|4. Mitigate Risk: Funds can provide support to fall back to. This can help your startup get away from economic downturns or unforeseen circumstances.||4. Regular Reporting: Investors may require regular reporting and monitoring of the financial performance of your startup which can be a burden on your team.|
You should evaluate the pros and cons shared above to decide whether you want to raise the funding or run your startup completely bootstrapped. If you decide to raise funding, you can read this guide further for the options that you have for the same:
Funding Options for Startups
As a startup founder, it’s important to understand that there are various funding options available. Each of these options comes with its own requirements and processes.
Your choice of funding might impact the steps you need to take further. Below are some of the common funding options available for startups:
- Bootstrapping: Using personal savings and revenue generated by the business to fund business operations.
- Friends and Family: Raising investment from known people who believe in your business idea.
- Angel Investors: Individuals who provide capital in exchange for equity or convertible debt.
- Venture Capital: Professional investment firms that invest their capital into high-growth potential startups.
- Crowdfunding: Raising money from a large number of people, often through online platforms like Kickstarter or GoFundMe.
- Accelerators and Incubators: Programs that provide funding, mentorship, and resources to startups in exchange for some equity.
- Bank Loans: Traditional bank loans or lines of credit are offered as per the standard guidelines.
- Strategic Partnerships: Collaborating with larger companies or investors who can provide funding and expertise.
- Government Grants and Subsidies: Support offered by various government agencies to promote economic growth.
Here is a complete guide for you to understand more about these funding options: Major Funding Options For Startups.
A Complete Step-by-Step Process to Raise Funding
Now that you have decided to raise funds for your startup and also understand various options, let us take a look at the important steps that you will need to follow:
Step 1: Define Your Funding Needs
You should start by determining the amount of funds you need and how you will use it to scale your business. This will be an important factor in approaching potential investors. No investor will be interested in investing money in a business that cannot forecast the potential ROI for them.
Example: If you’re developing a new software product, you might need funding for product development, marketing, and hiring skilled engineers. You can create an Excel sheet with all your expenses at least for the next year.
Step 2: Create a Compelling Pitch
You will need to prepare a compelling pitch that clearly conveys your startup’s vision, mission, and value proposition. This pitch will be used in your presentations and meetings with potential investors. It is one of the most important
Example: Your pitch should highlight the problem that your startup is solving, your target market, and your unique selling points. It should also have all the important details related to your business and some details about the forecasts.
Step 3: Identify Potential Investors
Description: Research and identify potential investors who are a good fit for your startup. This might include angel investors, venture capital firms, or other relevant sources of funding. You can study your competitors to know about their investors and how they approached them. There are various platforms where you can find and connect with potential investors.
Example: As shared above, you can use online investor directories, attend networking events, or look for referrals through your personal or professional network.
Step 4: Prepare a Business Plan
Description: Sit with your team and prepare a business plan that outlines your business model, financial projections, market analysis, and growth strategy. This document will be very important in convincing investors of your startup’s potential and a detailed business plan can be a game-changer for your investment pitch.
Your business plan should provide a clear roadmap for your startup’s growth and profitability over the next few years.
You can download and use business plan templates from here: Business Plan Templates
Step 5: Pitch Your Startup
Once everything is ready, you can arrange a meeting with investors who are interested in your business proposal. You can also optimize your pitch based on the investor you are pitching to by including relevant details as per their interests.
Example: If you’re presenting to a venture capital firm, you can focus on the potential for rapid growth and a higher return on investment.
Step 6: Negotiate Terms
If the investors express interest after the delivery of your pitch, you can negotiate the terms of the investment. These terms can include equity stake, valuation, and any conditions or expectations.
Example: You should be prepared to discuss equity dilution and any potential board seats or decision-making rights that you want to provide.
Step 7: Due Diligence
Investors will conduct due diligence to verify your startup’s claims, financials, and overall health. Even with the shark tank deals, there were a few startups that did not receive the funding after the due diligence process. The sharks might have found some irregularities in the claims or their business processes.
Thus, you should be transparent and prepared to provide all the necessary documents.
Example: Due diligence may include financial audits, legal reviews, and market analysis.
Step 8: Finalize Legal Agreements
Once due diligence is complete, you can finalize the legal agreements that outline the terms and conditions of the investment. You can consult with a lawyer or business consultant to understand all the clauses and mentioned terms before getting into an agreement.
Example: Legal agreements may include a term sheet, investment agreement, and shareholder agreement.
Step 9: Receive Funding
Once all documents are signed, the investors will provide the agreed-upon funding to your startup. You can use this funding for your business growth. Make sure that you keep the investors informed about the expenditures and also have a well-maintained expense tracker.
Example: This funding can be in the form of equity investment, convertible debt, or any other agreed-upon financial instrument.
So, here comes an end to this article and we hope that you now have a clear understanding of the funding process. While running a bootstrapped business is a commendable approach, many businesses require external funds to scale their operations quickly.
If you can run your startup bootstrapped, it is well and good. But, if you require funds then raising the funds is not something to hesitate from.