Entrepreneurs looking for investor funding often fail to realize that all money comes with strings.
The investor asks the entrepreneurs for their intended “use of funds.” Those who respond with one of the wrong answers, such as “I want to pay myself a salary,” usually go home empty-handed.
Startups investors plan for the fundraising should be cautious about their plan to raise funds. Your reason for fundraising must be genuine and attractive in the eyes of the investor.
Here are some guidelines that will help you with the right answers, not only in closing your next investment, in planning when and how much money to ask for:
1. Investors are most interested in helping you scale the business. That means they normally only invest in startups with a working product that has already been sold to at least one customer for full price (beta tests, giveaways, and best friends don’t count). They are willing to cover marketing, inventory, and scaling, but not product development.
Means investor will plan to participate in a fundraising round if your approach is towards scaling the business, not for your benefit.
Startup investors always focus on the high future growth with your full commitment towards the scope of growth.
2. Make your focus and priorities clear. Genuine, clearly understandable, and focused business expense plan is helpful, rather than making a list of routine expenses and salaries.
The recommendation is that you simplify your use to no more than three items or categories, with a percent allocation to each. An example might be 50 percent for marketing, 30 percent for inventory, and 20 percent for staffing. Have backup charts for investors wanting more detail. This is an example and you can plan yourself that will attract the investor.
3. Need funding for your risk dilution is the red flag.
Investors take the risk if they are confident in your startup idea and ready to take the equal risk. You can’t take money from investor’s amount as salary but spend money on staff, marketing, product development, etc.
You must take the equal risk for the startup’s future growth opportunities.
4. Reasonable amount in allocation.
Promote startups and their products needs a remarkable amount of money to invest in marketing and event management. Low investment in marketing will make investors in confusion about the successful launch product. High spending on marketing makes investors confident about future growth and success.
5. Use funds aggressively.
Investors are not bid on the startup, which is rich of cash in the bank and not aggressively makes expense on business growth. Investors never bats on the startups whose future expanse plan is not clear.
You must spend money on product development and business growth, rather than on cash in hand. The investor never bats on the startup, which is cash-rich and not aggressive about the expenses to get high growth.
If you want millions of dollars then always be in short of money. What you got you must spend.
6. Tie use of funds to real traction milestones.
A valid milestone might be closing a specific big-name customer or channel, such as Walmart, or it might mean getting your first 100,000 social-media followers, by a given target date. Building a huge inventory before you have a confirmed customer is not a convincing strategy.
If you are really looking for research and development money, and you didn’t sell your last startup for $800 million, professional investors are not the place to start. Hopefully, you can find some friends or a rich uncle who believes in your potential. The other alternative is to find a strategic partner who knows the space well and will benefit from your solution.
Professional investors always look for a proven business model and an existing revenue stream to minimize the risk. Then they look at the people behind the model, the execution status and how they might get their money back. Your proposed use of their funds will be seen in these three contexts. They will look to your business plan for cash flows and specific return on investment projections.
In all cases, your goal must be to explain how the investment will help you scale up the business and become more profitable sooner. You should always be prepared to mention a plan B, if possible, to grow more slowly by reinvesting initial earnings over time. Confessing that you are in survival mode, desperate for money now, will not improve your odds with investors.
Whether it be in the context of a five-minute elevator pitch or a more formal presentation to professional investors, the projected use of funds should be summarized and prioritized into three “chunks.” These must remain focused on scaling the business. Investors want to be convinced that your use of their money will maximize their returns in the first five years, as well as yours. After that, all you have to do is make it happen.