Strategies To Secure Investment Funding: A Comprehensive Guide

Funding is the money required to start and run a business. It is a financial investment in a company for product development, manufacturing, expansion, sales and marketing, office spaces, and inventory. There are multiple sources of funding available for startups, including self-funding, friends and family, crowdfunding, government grants or loans, and venture capital. When seeking funding, it is important to have a detailed financial and business plan, as well as a strong proof of concept.

Friends and family

• Consider your company's valuation: Although friends and family may not care about the actual valuation, they want to see that you have put effort into assessing the worth of your company and are serious about your business idea.
• Create a detailed business plan: Investors want to understand the inner workings of the company. Creating a detailed business plan will help you communicate your vision and make your loved ones feel confident in your ability to execute it.
• Understand the different types of funding: There are three main ways your personal network can invest in your company: loans (repaid over time with interest), gifts (no repayment necessary), and equity (giving up a piece of the company in exchange for investment).
• Write and communicate the terms and repayment plans: Once you have settled on an investment type, it is important to nail down the specific details of the arrangement. Consult a lawyer who specializes in business or startups to ensure that both parties understand the risks and are protected in case of future disagreements.
• Pitch to trusted loved ones: Start by pitching to close family members who are most likely to want to invest in your company. Then, branch out to close friends, former classmates, old colleagues, and mentors. Practice your pitch and be prepared to answer questions about your business plan and expected returns.
• Be clear about the risks: Mixing money and personal relationships can be risky. It is your responsibility to be candid about the risks involved in investing in your company, especially at an early stage. Make sure your loved ones understand that there is a possibility of zero-dollar returns.
• Create appropriate pitches: Tailor your pitch to each individual. A close relative might prefer a face-to-face conversation, while a former colleague may be happy with an email. Be transparent, communicate your goals, and explain how you plan to use the funds.
• Set a clear communication schedule: Let your investors know that they will receive periodic updates, perhaps on a monthly or quarterly basis. This will help manage expectations and keep everyone informed about the progress of your business.
• Don't rely on friends and family for too long: Force your business to go through the disciplined assessment required when pitching to professional investors. Too many cash infusions from friends and family can make your cap table unwieldy and may turn off future investors.

Crowdfunding

It is a very low-risk option for business owners as they get to retain full control of their company. Additionally, if the campaign fails, there is usually no obligation to repay the contributors. However, it is important to read the fine print and understand your full financial and legal obligations as each crowdfunding platform is different.

Before launching a crowdfunding campaign, it is beneficial to build a community of loyal fans who will support your campaign from the beginning and maintain momentum throughout the entire journey. This can be done through social media, networking events, or by offering incentives to those who sign up to support your business early on.

When creating your campaign, it is important to have a clear and detailed plan. This includes knowing how much funding you need and what you will use it for. It is also beneficial to offer incentives or perks to those who contribute to your campaign, such as the product you plan to sell or special perks like meeting the business owner.

Running a crowdfunding campaign requires maintaining momentum and consistently working towards your funding goal. This can be done by regularly updating your contributors on your progress, offering new incentives, and reaching out to potential contributors.

Government grants or loans

Government grants and loans are a great way to fund your business without giving up equity or control. These funding opportunities are offered by the government to support small businesses and economic growth. Here are some ways you can get government grants or loans:

Small Business Administration (SBA)

The Small Business Administration in the United States offers various funding programs to help small businesses, including:

• SBA-backed loans: The SBA partners with lenders to provide loans to small businesses. These loans have favourable terms and can be used for starting or expanding a business.
• Disaster assistance: The SBA offers low-interest disaster loans to help businesses recover after a declared disaster.
• Investment programs: The SBA has investment programs such as the Small Business Investment Company (SBIC) and the Small Business Innovation Research (SBIR) program, which provide funding opportunities for small businesses.

Government Loan Schemes

Some governments offer loan schemes to provide collateral-free debt to entrepreneurs. For example, the Indian government has the Startup India Seed Fund Scheme and the SIDBI Fund of Funds Scheme. These schemes provide debt financing to aspiring entrepreneurs to help them access low-cost capital and accelerate the growth of the startup ecosystem.

Government Grants

Grants are typically awarded to organizations and non-profit entities rather than individuals. However, you can look for government grants that support scientific research and development or specific industries. These grants can provide funding for product development, innovation, and commercializing new technologies.

Other Government Support

In addition to grants and loans, governments may offer other support programs to help small businesses, such as tax incentives, advisory services, and local support initiatives. These programs can provide valuable resources and guidance to small businesses.

When seeking government grants or loans, it is important to carefully review the eligibility criteria and application processes. These opportunities often have specific requirements and may be competitive, so it is essential to understand the process and submit a strong application.

Business loans

Pros

• Interest rates may be lower with traditional financial institutions.
• You retain complete control over your business.
• The interest you pay on debt financing is tax-deductible as a business expense.
• The monthly payment is a known expense that can be accurately included in your forecasting models.
• You don't have to make monthly payments, so there is often more liquid cash on hand for operating expenses.
• Investors understand that it takes time to build a business.
• It can help you build business credit.

Cons

• It can be tough to qualify for bank loans, especially for new startups or those without established business or personal credit.
• Adding a debt payment to your monthly expenses assumes that you will always have the capital inflow to meet all business expenses, which may not be the case for small or early-stage companies.
• Small business lending can be substantially slowed during recessions and other tough times for the economy.
• You will have to give up ownership of a portion of your company.
• With equity financing, you'll be required to consult with your investors before making any business decisions.
• The cost of funding might not be as transparent or easy to understand.

How to Get a Business Loan

To increase your chances of securing a loan, you should have a business plan, expense sheet, and financial projections for the next five years. These tools will give you an idea of how much you'll need to ask for and will help the bank know they’re making a smart choice by giving you a loan.

Once you have your materials ready, contact banks and credit unions to request a loan. You’ll want to compare offers to get the best possible terms for your loan.

If you have trouble getting a traditional business loan, you can look into SBA-guaranteed loans. When a bank thinks your business is too risky to lend money to, the U.S. Small Business Administration (SBA) can agree to guarantee your loan. That way, the bank has less risk and is more willing to lend to your business.

Venture capital

Identify your target investor

If you're in the very early stages of starting out, venture capital funding is unlikely to be the best option. Instead, you could seek funds from friends and family, a startup loan, crowdfunding, or business angels.

Before deciding on the group of investors you want to target, research the market thoroughly. Each venture capital firm has its own interests, whether that's software, fintech, or green technologies. Find one whose interests match your business.

Each firm will also vary in the amount it's prepared to invest in a business, so bear this in mind when looking for a suitable investor. It's important not to waste your time or look unprofessional by approaching companies that invest amounts that are too large for your needs.

Create a shortlist of investors

Once you've researched the market, you should have a good idea of who you would like to invest in your business. You should also be armed with lots of useful information about the investment process and what to expect.

This should enable you to reduce your list to five or six candidates. Try not to have more than ten, as this can be difficult to manage if you end up getting a lot of interest.

Keep in mind that most venture capital firms will put a member of staff on your board and will want to keep a close eye on how you spend their money. Remember that you will need to have a close working relationship with them, so choose carefully.

Approach your target investors

If you know someone at one of your target businesses, this will give you a foot in the door and enable you to set up a meeting more easily. If you can't think of anyone, get on LinkedIn and see how each firm might be connected to people you know. If you find a connection, you might be able to get an introduction.

If you don't have this advantage, it's worth attending events that investors frequent so that you can get networking and introduce your business.

Another option is to send an email to each VC, but this won't always be the most effective way to get the attention of potential investors. VCs get lots of emails every day, so you'll need to do this the right way to ensure your email stands out.

Curate your pitch and brand message

If you're approaching a lot of VC firms, it's important not to get them mixed up in your communications. Make sure your templated information is concise but provides enough detail.

Get straight to the point and grab their attention, rather than writing a long introduction. State who you are, what your business does, and how well it's performing. Mention your competent and hardworking team. Avoid including a lot of data at this point, so as not to overwhelm the recipient. If a VC is interested, they will get back to you and ask for the figures they require.

You don't need to negotiate at this point, so don't refer to how much of your business you are prepared to give away in return for their investment.

Ensure each email you send is different and focuses on why you were attracted to that particular VC firm. This shows you've actually considered the company carefully, rather than sending out the same email to multiple VCs at random.

Negotiate

Once you've sent your emails, it can take a couple of weeks to get a reply, so avoid chasing them up until this time has passed. Once you've found a potential VC partner, it's time to negotiate. Term sheets are preliminary, non-binding agreements outlining the major terms of a VC investment.

The main sections of a term sheet include:

• A funding section outlining the financial guidelines of the proposed investment, including how much the VC firm is offering to invest and how much equity it wants in return.
• A corporate governance section defining the distribution of power among the co-founders, VCs, and other stakeholders, specifically related to the company's decision-making.
• A liquidation and exit section covering what happens regarding owners, investors, and shareholders if the company is dissolved, liquidated, or acquired.

Because term sheets are non-binding, it's important to negotiate any terms you're not completely happy with. Never accept a deal you don't feel 100% comfortable with – you can always walk away and see if you can find a better deal elsewhere.

Frequently asked questions