A few centuries ago, very few people longed to start a new business. In many parts of the globe, the business community was tightly knit and was run only by families. Cut to the present: since the start of the internet and digital boom, a large number of educated and talented professionals are interested in starting a new business venture. Also, with technologies such as AI, ML, digital marketing, and cloud computing, the entire process of starting and running a new business has become easier. However, the truth is sour. Yes, every day, you can see start-ups hogging the limelight with fancy new names in industries ranging from pet dog food to IT consulting.
However, if you check the names of start-ups that were started hardly five years ago, 95% of them would have closed down for various reasons. One of the prominent reasons why start-ups faced death in the initial stage or after two years was the lack of funding or getting investors. In this article, we shall look at the challenges start-ups face in raising funds for survival and success.
Why Do Start-ups Need Funds?
You may be a first-time entrepreneur or one whose family has been in business for generations, but if you are venturing into a new business, you can survive for the first two months. The next four months will be the toughest part of surviving the cut throat competition.
You may have a bright and innovative idea that, you are sure, can rake in the investors at the drop of a hat. Your mentors and close friends may have sworn that the business idea will definitely be a success. However, if you want the business to go global, it is mandatory to have funding for various essential reasons, such as renting an office, designing/launching official websites, and designing the first product prototype.
Why do start-ups face challenges in raising funds?
Kindly note, it is not only start-ups that face challenges in raising funds but also well-established businesses that face the same challenges when trying to raise funds for a new venture. But yes, the challenge for start-ups, especially if you are a first-time entrepreneur, are convincing investors that your business idea will rake in profits since you do not have a track record.
Agreed, you can draw heavily from your savings or ask your friends or close relatives for financial help but the amount will last only for some time, maybe six to eight months. However, you will be lucky if you can get an angel investor.
Challenges Startups Face to Raise Funds for Survival and Success
1. Designing a Scalable Business Model
If you want to expand your already established small business, need a loan, or want to set up the business only with venture capital, then it is mandatory to have a scalable business model. Investors will want to fund business ideas that can be easily scaled. So, take time to design a business model that can convince the investor to put his or her money on your business idea. Ensure that the business model contains vital points that can generate profits with minimal expenditure.
Core Points
- Let your business model be unique; please do not create a similar pattern to your competitors.
- If possible, ensure to make use of the latest software technologies, including automation, in your daily tasks. This method will make you less dependent on human workers if the tasks are monotonous and manually operated.
- An investor will want to know the ways you can take your business to the next level, so be prepared to face a volley of questions.
- The scalable business model should also contain Information on roadblocks and how it can steer towards growth. It should also have a foolproof plan for continuous improvement.
If you do not take time to design the perfect scalable model, then it will be difficult to find investors for your business venture.
2. Figuring out the right amount of funding
You may have to ask for funds from an investor, bank, or other organisation. But first, you need to know the right amount of money for your needs. For better assistance, venture capital experts suggest you write a business plan.
The points investors will search for in your business plan are:
- Financial Forecast: How you can set up your business with minimum infrastructure; the returns they can get in the future within a specified period. You should have a business model to justify the figures.
- You need to consult an expert or take guidance from your peers in the industry to know the right figures. The process does take time, but when you approach an investor, you will be better equipped to give the right details.
3. Selecting the Right Investor and the Right Funding Option
Yes, there are many ways to get investors as well as the right funding organisations for your start-up. However, you need to select the most suitable one, and to save time, let it be more than one.
The best way, according to venture capitalists, would be to bank on your family members or close friends. The reason is that you can have flexible terms and save plenty of time. However, do not venture for this method unless you are sure about its success, or your personal relationships may fall into ruin. Though in many families it will be hard to find investors, you can overcome this challenge by designing a foolproof business plan and paying back the loan amount as you would to an investor.
Credit Cards
There are many global banks that have credit cards designed for entrepreneurs and start-ups. So, this method is a time-saving option but also an expensive one as the interest rate will be too high.
Please note that your credit score will take a direct hit if you miss the payments. In the future, you may have to face the music when asking for loans from banks.
4. Knowing the Funding Process
Your start-up has to go through the perfect process in order to become a success. Yes, your product may belong to a certain industry, and every domain has its own share of challenges. You need to understand the hurdles in your funding process so that it may become easier.
The funding process will go through different stages, and the payment options will vary according to each stage. Please note that until your product or service becomes public, you need to remain focused and capable of answering a flurry of questions.
Pre-Seed Funding
You need to go through this stage to get your start-up on its feet. For many start-ups, it is not considered a formal round of funding. Usually, it is the start-up founder who does the initial investment with his or her own money and pools the money from friends and others.
Angel Funding
Convincing an angel investor to put his or her money into your business idea is not a piece of cake. You need to have a proper business plan and get to know their complete background in terms of investment. There are some investors who put their money only in a certain industry sector. However, if you get an angel investor for your project, then you also need to adhere to their terms and conditions. Usually, angel investors like to invest during the seed funding of a start-up so that they can get an idea of the entire business plan.
However, an angel investor, for a part of the money he/she invests in your company, would like to have equal ownership. Also, you should not forget that they can also interfere in company matters. If you are venturing out into a small business, such as a coffee shop or store, then you can search for angel investors.
Venture Capitalist
These businessmen usually like to invest in start-ups after the seed funding round. They can invest heavily in your start-up, ensure that it is successful, make the business get listed on the stock exchange, get a large number of shares, and then exit the company by selling all their stocks to another company.
There have been instances when a start-up has gotten its first round of funding from the best investors in the industry. However, as per a survey, nearly 48 percent fail to raise the second round of funding, which is crucial. While the first round of funding can help your startup get off the ground, the second round is required to make your product or service available to the public. However, if you have fulfilled every point as per the first round of funding agreement, the venture capitalists as well as the angel investors will be ready to take the risks.
If you need to get the second round of funding, ensure to follow the list:
- Stick to your business idea: You may have gotten a hefty sum, but the investors will keep tabs on the ways you spend the money. So, ensure you follow a transparent method so that they can always have the belief of profit. Do not spend unnecessarily on workspace and furniture.
- New Technologies: Before getting an investor, you should have already written down the technologies needed to get your business on the market.
- Keeping Everyone in the Loop: If you are going for a second round of funding, ensure to keep the existing investors in the loop as a sign of trust.
Third Type of Funding
This is the stage when your start-up, having already established a name in the industry, wants to expand its operations. If your company has raked in profits, chances of you getting funding from national banks or acclaimed investors are possible.
To ensure your start-up becomes a success, you need to ascertain the type of funding in your industry sector. Be ready to take the challenges as they come, and you will succeed in your dream of becoming an entrepreneur.
Can you raise the required amount via crowdfunding?
These days, even movie producers rely on crowdfunding to produce films. However, you need to have a wide network of friends and generate the required publicity for your business idea. Yes, you can make use of Digital Marketing campaigns. However, you need to have the proper tools to measure the results. You need to target the right audience to get the required investment via the crowdfunding option.
To Summarize
The above article mentions only a few of the challenges start-ups face while raising funds for their success and survival. For a newbie, it will be hard to even get an appointment with the concerned manager of a venture capital organization, angel investor or a crowd-funding firm.
Check with a first-time entrepreneur who has stood by thick and thin in the past five years, and he/she will tell you that getting investment is not an easy job. However, if you have taken the pledge to become an entrepreneur and want to succeed at all costs, then it is only a matter of time before your start-up becomes a global organization.
Article by Sathya Narayana B
If interested to learn more about start-ups, then please read:
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