Even the most original business plans or ideas can only go so far in advancing a start-up company. As a result, it’s almost a given that your company will require funding to expand.
Funding business ideas or expansion is one of the biggest problems that entrepreneurs face. You’re going to need some assistance unless you’re independently wealthy. But where to start? If you’re wondering how to raise money for a business, we’ve compiled a list of some business fundraising channels you can take advantage of.
Table of Contents
How to Raise Money for a Business
If you want to start your own business, how do you raise money? Getting the money you need to start your new business requires a thorough understanding of capital raising.
Determine Your Capital Need
You must first create a long-term business plan and your company’s strategic goals before you can assess your capital requirements. If your business is already up and running, you have an advantage in knowing how much it costs to run it. If you’re just starting out, some of the expenses you need to take into account include:
- Office space
- Hiring new employees
- Purchasing technology/other hardware and software tools
- Marketing budget
You must strike a balance between having enough capital and avoiding borrowing too much. A lack of capital could indicate a broader weakness in your plan and the wider market. On the other hand, too much capital and you may find yourself giving away more equity than you intended or facing high monthly debt repayments.
Choose a Funding Type
Most likely, you’ll need to decide between equity capital and debt capital. You’ll probably have to give up some ownership of the business and a certain amount of control over business decisions when approaching venture capitalists.
You’ll be taking on debt if you work with non-institutional investors. Calculate the potential debt repayments based on your anticipated monthly income.
Make sure you carefully consider your funding type because what works for one business might not work for another.
Business Valuation
The first step in the fundraising process is to estimate the company’s value. Based on its potential, the entrepreneur must determine the value of their company. You must also make rational assumptions.
A pre-money and post-money valuation of the company is required when seeking private equity or venture capital fundraising. How much of your business you give to investors will depend on these projections.
The pre-money valuation of your business plus any additional funding equals the post-money valuation. Investors will ask probing questions regarding how you came to your pre-money valuation, so make sure you can show your rationale.
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Connect With Investors
It’s time to start presenting your idea to potential investors. Reduce the length of this as much as you can because the more time you spend meeting with investors, the less time you have to manage the day-to-day activities of your company.
Leveraging your professional network is the most straightforward method of finding investors. Such introductions can serve as a springboard for meeting additional interested parties.
If you are offered a deal, the investor will give you a term sheet. This brief document summarizes the key elements of the transaction, including the amount of the investment, the amount of equity received in return, and any other important terms.
Even though you will have the chance to bargain, after you sign the term sheet, it will be much more difficult.
Following Funding Rounds
The majority of prosperous businesses receive more than one round of funding. A single round of funding might just serve as a launching pad for approaching more illustrious investors.
Before embarking on your subsequent funding rounds, your pre-money value should be higher than the post-money value of the last round of funding. New investors want to know that you’ve used your funds wisely and that this is a expanding company, which is why it matters.
Prior to moving on to the following round of funding during each round of funding, you should aim to fund 12 to 18 months of operations.
Due to the fact that investors who invest in later stages demand evidence of business growth and momentum, later rounds are typically more difficult to fund.
What’s the Key to Securing Investment?
Investors’ main concern is a positive return on their capital, ideally one that is disproportionate to it. Some may expect this return quickly, while others may be willing to stick it out for long-term growth.
Put your attention on the numbers and show that you’ve done a thorough analysis of your target market and the competition. Give precise projections without going overboard for impact. Being overly ambitious may reduce your ability to raise money since seasoned investors are well aware of business valuations.
Focus on the numbers that show investors they are very likely to see a positive return on their investment and condense your pitch.
Best Practices for Raising Money for a Business
Always Practice Due Diligence
Regardless of the type of fundraising you do, always exercise caution to ensure that you are not getting the short end of the stick. This is especially true when it comes to financing, angel investors, or venture capitalists.
Ensure That Bookkeeping is Organized
No matter whether you’re a small business or bootstrapping, you should always make sure to keep accurate books. The first thing financial lenders or investors look at is whether a company’s books are in order.
Fine-tune Your Business Pitch
As you prepare your business pitch, improve your value proposition. Donors and investors are interested in your impact and how their funds will contribute to it. Don’t forget to highlight the distinctive features of your company.
Use Creativity for Fundraising
Get creative with your fundraising efforts. Like in a business deal negotiation, it’s about much more than simply asking for a check. Consider unconventional approaches when looking into fundraising possibilities.
Share Your Enthusiasm
Particularly when crowdfunding, convey your enthusiasm to your audience.
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Tips for Maximizing Your Cash
Here are the details:
Minimize Overhead
One of the biggest costs that the majority of startups and small businesses must deal with is overhead, which includes costs like utilities, technology, and rent. You can free up money for use elsewhere if you can keep your overhead to an absolute minimum.
That’s why basing your operation in a virtual office or other shared workspace, like Bond Collective, is a wise choice for businesses at all stages of development. A small monthly fee that is significantly less than what you would pay to maintain your own space includes everything you need to do your job well.
That just makes good cents.
Avoid Conventional Leases
The cost and restrictions of a traditional lease are well-known. You can conserve much-needed capital by skipping the conventional lease altogether and opting instead for a temporary office space like those offered by Bond Collective.
Along with saving money, you’ll be in a better position to change the size of your workspace as your company’s needs change.
At Bond Collective, you can work from a hot desk in June, a private office in July, a multi-office suite in August, and back down to a reserved desk in September. Saving your own money is the best way to raise capital for a business.
Keep Your Burn Rate Low
Burn rate is the rate at which your business spends money before generating positive income from sales and operations. Maintaining a low burn rate will give you more resources to invest in other areas of the company.
Additionally, you’ll give yourself a longer runway (i.e., how long your business has to become profitable before it fails). And with a longer runway, your business will look more attractive to potential investors and have a much better chance of success.
Summary: How to Raise Money for a Business?
The two main ways to significantly fund your company are through debt and equity capital. Prior to approaching investors, make sure you can clearly articulate your business plan and support it with pertinent market research if you’re strategizing and doing research on how to find investors for a startup.
On one platform, Crunchbase gives you the ability to do market research and connect with the appropriate decision-makers.