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“I want you to deal with your problems by becoming rich!” – an iconic quote from the iconic movie “Wolf of the Wall Street.” Depending on what people truly want, they get the spirit of becoming ultimately wealthy. But how can one achieve that with a recently launched startup while stumbling across various challenges in obtaining financial support for your project?
Just imagine this: you open a young business. You are immediately challenged by finding the investors while estimating every detail in your financial plan and gaining trust to win your money over other people. Have you already come across a similar situation? Or perhaps you had a different experience but still can relate to the spoken troubles?
Specifically for young startupers, we prepared an article packed with a few pieces of advice and tricks that you can follow if you happen to encounter intimidating challenges in obtaining startup financial support.
Types of Funding
Before we dive into critical financial challenges faced by startups, you need to know just what kind of funding will suit your startup product. Once you’ll understand that, you will learn how to approach an investor, interact with him, and when is the right time for asking the right amount of capital. That’s why for now, let’s take a look at what your basic options are to get your funding.
A loan is provided to an individual from a bank or any other financial institution, expecting a payback when the startup fails. And as you might already know, it is impossible to get a bank loan without some kind of collateral.
If you already have a business up and running, a proper market niche, stable cash flow management, then getting a loan is not an issue! However, imagine you get one, and everything just falls unexpectedly. What’s next? Well, once you hit bankruptcy, you must sell all of the company properties to the bank. If you don’t have enough, you can extend the due time payment. But in that case, you’ll have to back that extension with your personal belongings (including your property). So, a piece of straightforward and useful advice from us: Do Not Apply For Loans.
There exist other options, which are far more suitable and convenient for opening your business.
Grant is money that can be received from any state, region, institution, or even individual you can get without payback. What’s the catch here? To get the grant, you’ll have to go through a bit of a long battle: apply for it, compete with the other startups, and if you win it, then you have to spend every single dollar only on the proposed project plan and nothing else. Additionally, you’ll have to track down outstanding results and present them to the person responsible for the given grant.
Furthermore, some grants are particular in some business fields. They seem like a good option, right? However, you may not always find the right grant that you are looking for. On the other hand, some specific websites are oriented toward providing sufficient funding to small businesses, including startups. Take a look at the list we gathered. See if you can find what exactly you are looking for (especially during the COVID pandemic):
- Small Business Development Centers
- USDA Rural Business Development Grants
- National Association for the Self-Employed (NASE)
- FedEx Small Business Grant Contest
- Minority Business Development Agency (MBDA)
An angel investor is an investor for small startups, whose net worth is more than or equals 1 million dollars. As they were startups themselves and became huge companies, they are willing to invest in small startups. However, the amount that they give is not that big and is not more than 100,000 $ on some occasions. Looking for a larger investment? Then, you probably need 5 – 10 angel investors, as the average seed amount is around 350,000$.
We suggest you be polite to your investor and try to get him some kind of return or get him a good position for your startup. Also, never tell an investor to sign an NDA with them. It will only turn them away immediately. You have to be completely honest and open about your product. That being said, if you still want to secure your product from stealing, you can just effortlessly patent it. That’ll be more than enough. Otherwise, your potential investor will be offended and ignore any further requests from you.
Venture capitalists are also one of the key investors that can make a substantial portion of your startup funding. These are the people from different institutions who mostly focus on professional startup investment. Compared to “angel investors” motivated to see their funded startup succeed, venture capitalists are focused on gaining profit from them. The reason is straightforward: startups are very risky to invest in. That’s why VCs are making many investments in different ones so that at least a few will achieve their result and pay off big. For this reason, the investments mostly focused on those startups that have meager competition in their market niche and have lots of potential development branches.
Early Startup Financial Challenges
Now, let’s see what kind of milestones you may encounter during your early journey.
The very first challenge in obtaining startup financial support is your financial planning. By creating a detailed budget, tracking down all of your expenses, and comparing them with the projections, you make some cuts accordingly.
However, to succeed in operating the business expenses, you’ve got to stick to your goals first. So the first step is to highlight all of the sources of income. It could be your accounts, sales profits, or your investment. The second is to identify the ongoing expenses: rent, equipment leases, etc. After that, write down the costs that can be either altered or changed every month(business traveling, wages for contractors, marketing). Don’t also forget to cover the expenses if any emergencies will arise.
At JetRuby, we assist young entrepreneurs in assessing their requirements necessary to complete their project idea successfully. Including the precise estimation of the budget expenses. Most of our clients have already launched their software products and are looking forward to their businesses’ next scaling phase. See how exactly we assisted them in the process of their early day.
One of the startup financial challenges that startups face during their first year of launch is unforeseen expenses. According to Clutch’s survey in 2018, around 35% of all small businesses have reported that their main concern was the expenses of emergencies.
Therefore, when you start planning your budget expenses plan, do estimate some money for emergencies. Then it won’t be that much of a surprise nor stress for you.
However, sometimes a whole big bang crisis may occur. And then you need to think about how to minimize the incoming damage. Perhaps you can cancel your business trip? Or maybe you can cut down some marketing expenses for the time being? That’s why you need to try and predict the most obvious ones to make your business more stable.
Networking is one of the things that your startup can’t run by itself. Forging the relationships and connecting with other businesses in your field is a pledge for your success path. There are various ways to make a perfect network of your business partners. Start from connecting with different founders via social platforms (LinkedIn, Angel.co, Facebook) and to meeting them in person at various startup events.
Suppose you formed a team of entrepreneurs and are ready to dive into your product’s development process. You’re still at it and are wondering just how exactly will you sell your solutions or what kind of business model you should use. In that case, a few mentors or even ex-startup people in your network net can assist you in solving these issues. Plus, they can also be your business buddies in producing valuable and unique ideas for your future projects.
In our case, one of the most frequent times when we use our network contact data is when our team wants to share our business insights. Be it a tweet regarding our recent news feed or a LinkedIn post about a new article in our blog. We are glad to deliver valuable information to our partners. If you’d like to get a chance to know us better, follow our blog and see what we can offer to your rising business plan!
That’s the first thing that will be on your mind when you will start to uplift your startup group. It can be also identified as one of the financial challenges in the startup communities. Since once you’ll know all of your product features, work around your theoretical marketing campaign, finish your financial plan and start to work on the first digital prototype of your product, you’ll be hitting an investment wall.
It is good to properly determine and research what kind of funding your project requires. By identifying the right type of investment, you will already know just how serious the company is. However, some people are determined to jump from one interested company to another, just to “cut the unnecessary time,” which they can spend on more important things. However, this is not the way you should choose the right investor. Because you need to research the potential list of investors, understand what type of businesses they are investing in, and what stage they do it. A small word of our advice is to spend more time on your pitches, and you’ll construct a more specific funding approach.
“A Laser Beam Shotgun Approach” by BigFoot Networks
So, you overcame all financial challenges and your startup reached a point where you need to make a pitch for your first investors? Then it is time to present a method of “BigFoot Networks” for finding the right investors.
Let’s start by saying how exactly this approach works. The “Shotgun” part in the naming concentrated on connecting with every possible investor you will identify first. The “Laser beam” part points to the in-depth research you have to do to find the right investors that should follow specific criteria.
These criteria are the rules that are suggested for every young entrepreneur to follow by. First of all, an investor has to have money. It sounds frustrating and stupid, but just hear us out for this one. Every investor may indeed attend meetings, social events, and may be interested in investing in your business. However, it doesn’t certainly mean that they do have the money at the current moment. They may just stay active with the local community while observing the startup ideas and getting the chance to invest in them once they get more funds. To find out whether an investor truly has the money, you can check whether their funding is still open, look up their website or recent news from the company, or you can just simply ask them directly.
The second thing you should look out for is whether the investor has your business type’s investment experience. Ideally, it could be companies mostly tied with B2B or B2C companies. Same as before, just by checking their websites, news or asking them directly will do the thing.
The last criteria are to avoid investors who have either fired certain founders or have too impractical tactics. You won’t get that kind of information that easily online. However, if you were to ask the people around in various startup communities in your local area, then you’ll probably get the idea of whom you should avoid.
Now, when you start to look out for investors, you may find out that your choice is limited to maybe 4 to 6. Why’s that?
Let’s start with the VC investors, which are relatively easy to find. A quick Google search for “VC investors in [your local area]” will give you a good amount of results. But don’t limit yourself to your local area only. Other big companies in your country or cities that can sponsor local startups and the international ones. So it’s worth trying and giving a chance to get your own VC investor. It may or may not be a long process, but it will pay off in big results if you secure a good VC investor.
If you consider the angel investors, you probably won’t find them so quickly. They don’t post or share any of their social contacts online. Therefore start searching for them by networking. Look for the angel groups in your local area. Occasionally, they meet other angel investors, compare notes, and sometimes invest in startups. In some instances, you may need to pay an entree fee just to get a chance to speak with the angel investor. It’s OK to do that once or twice to see their reaction and your results. Two consequent rejections from them mean that you should find another path to them. Some of the other angel investors are hidden either on Angel.co or LinkedIn so good luck finding them!
Once you’ve narrowed your choices, it is time to choose all of the investors on your list and approach all of them! This is why this method has a part of “shotgun” since you contact all potential ones to get a few replies. You’ll get 90% of rejections in most cases, so it is entirely normal to get that. Most importantly, you should get at least a few positive ones to get the chance to pitch your idea.
The last tip comes from JetRuby itself, which is about the presentation of your product. Sharing all details and discussing every bit of your idea is essential to build trust between you and your investor. However, to gain much more stable and confident assurance that the investor will agree to your terms is to present a working prototype, which is about 5% to 10% of your entire product. As of right now, JetRuby is offering you a free business product development strategy session. Where together with our business analyst, we will assist you to adjust your product vision and help you to create a feature list based on your idea requirements. For more information, you can read it on our Design and Discovery Phase.
Finding the right investor and overcoming financial challenges is a very tough path for finding a suitable investment at the right time. Most of the financial mistakes mentioned before are directly connected to how much effort and work you are putting into your startup since most young businesses are rushing too fast without predicting or even researching their development plan.
During the time we assisted various clients, we carefully listened to their stories and saw what kind of troubles they were facing and milestones they encountered. We gave them our tips and advice that we had followed when we were only a startup ourselves. Today we’d like to introduce you to a major step that will increase your chances for success in times called the Design and Discovery Phase.
This step is specifically designed for startups and young entrepreneurs. We create a detailed development plan according to your business goals, estimate your budget expenses, and analyze how exactly your business can launch with the minimum amount of risks. If you’d like to learn about what more we can offer to you in this program, you can check out our main Design and Discovery Phase.