New businesses face a bit of a catch 22 when it comes to funding. You can’t grow rapidly if you don’t have the capital available to fuel your efforts, but you often can’t get access to this until you’ve already got a proven track record of success.
The answer is to rethink your funding options and ensure that you make the right maneuvers at the right moments to keep your startup soaring without making sacrifices.
This straightforward guide will introduce you to some of the routes you can take to find the ideal funding for your fledgling firm, and some strategies for actually spending that money which will deliver maximal impact.
Understanding the Types of Funding & their Implications
First, unless you have a good grasp on the main ways you can pay for the growth-catalyzing changes your startup requires, you won’t know where to start looking or what the upshot of going with a given package will be.
This is a traditional, well-established option for small, ambitious organizations, and essentially means that you’ll hand over a portion of the ownership and control of your company to third party investors in return for the cash that they bring to the table.
Whether you work with individual investors who want to get in at the ground floor and effectively become founders, or you seek funding from a venture capital (VC) firm, there are perks as well as pitfalls.
The upside is that in addition to the injection of capital you’ll receive, investors who get a slice of equity can also bring any expertise and contacts that they have to the table to further enhance your startup’s position.
The downside is that giving away equity in a business means you also end up with less control, and could even be ousted from the organization altogether if you don’t retain a decent stake for yourself.
An increasingly popular alternative to equity financing, the rise of revenue-based financing is designed to let you grow your business without having any third parties take permanent ownership of any part of it.
In essence, you can upfront your revenue, with projected earnings being supplied as proof of what your business can do, and capital being offered to fund your efforts without diluting your equity whatsoever.
This is often how SaaS founders fund growth, but it does not only have to apply to this specific niche of the tech sector. Whichever market you occupy, if you’re struggling to seek out other founders, or investors of any kind, revenue financing could be the answer.
Obviously it requires you to have confidence in hitting your revenue projections, but if you have good reason to be confident, then go right ahead.
Thinking about Where to Spend your Money
The second aspect of funding growth which is often overlooked comes down to how you choose to deploy the assets that are put at your disposal once you’ve secured them.
This will of course depend on the point of the journey that your startup is on at the moment, and is entirely unique to your business. Even so, it’s possible to speak generally about the types of considerations you’ll have to keep in mind in this context.
Let’s say you’ve just shaken hands on a $1 million funding round, and this is the first cash injection of this scale you’ve received. You can expect to use this to put together your central team who will form the nucleus of your budding business, and will likely have to take on a multitude of roles, from developing the product to marketing and selling it, as well as any support that’s needed for your first customers.
$1 million isn’t enough to go much further than this, and is really only an amount that will buy you the time you need to get to the next milestone in your company’s growth.
If you’ve already got a core team together, and your next round of funding comes in at between $2 and $5 million. This is the point at which you can expand, but aim for new hires who will deliver the best return on investment (ROI) in the shortest time.
Get in experienced individuals with a track record in things like sales and marketing, and you’ll optimize the effectiveness of your funding.
Making your Pitch Count
The final point to make is that one of the reasons you may be struggling to bring other founders and investors onboard is that your pitching skills aren’t up to scratch.
There’s a lot at stake whenever you go to sell your startup to third parties, and if you don’t have much experience then you can expect to make at least a few mistakes, even if you are well prepared.
Half the battle is knowing what the investors want to hear, and tailoring your pitch to these expectations.
Don’t go into a VC pitch meeting without recognizing that the people in the room will want to get hands-on with the running of your organization, and not just fund its growth while taking a consultative role, for example.
Also be smart with how you use your time, and don’t overstay your welcome. A short, sweet pitch followed by a Q&A session is better than an exhaustive pitch which drags.
The Bottom Line on Funding
The truth is that funding growth isn’t always easy, but it’s something that becomes less taxing with time and experience. So work out what you want, build a compelling pitch, consider all the options for funding and financing, and be discerning.