It’s a stark reality many startups shut down in their infancy. Two common reasons for failure are that they either didn't satisfy a market need or didn’t attract enough financial investment to sustain their business. Sometimes these two reasons can be related.
If your startup can’t convince investors that its products or services can meet demand, then the investment may be more challenging to secure.
Let’s look at some common sources of investment:
● Family and Friends: Some of the most successful businesses in the world got a kickstart from the pockets of friends and family. Jeff Bezos, of course, accepted around $300,000 from his parents to start Amazon. To avoid any awkwardness, treat any investment from people you know as a documented business transaction, with the risks and rewards clearly outlined.
● Traditional Banks: The big banks are the most convenient sources of funding. They can be risk-averse though and may examine multiple metrics.
● Online Lenders: Many startups look at online lenders for support after failing to secure funding from traditional options because such lenders may guarantee fast loans. However, some online lenders hide predatory terms in contracts to catch startups and other small businesses in debt traps.
● Angel Investors: People with a net worth of at least $1 million and a yearly income of $200,000 who invest their own money in startups are classified as accredited angel investors. Accredited angel investors may invest in your company at any stage and can leverage personal experience to offer mentorship.
● Venture Capitalists: Venture capitalists usually invest an investor’s money in a startup that’s already somewhat established. Venture capitalists typically invest more money than angel investors but expect a larger return. They may also have more demands than angel investors, like a seat on the table of directors.
Many entrepreneurs start with personal savings before looking externally to send investors the right message. For example, Regan McGee, developer of the disruptive real estate marketplace Nobul, started his company with 15 years of personal savings. With the funds, the real estate maverick created a product demo and a mobile app that went on to impress real estate agents, developers, and brokerage owners.
Your startup must also have strong business leadership. A charismatic leader with a strong vision is more likely to court investors successfully. Pitching to investors that understand your industry is also helpful.
Additionally, investors will look for a strong investment pitch. Consider practicing your pitch with your partners before approaching potential backers. Investors will also want to see a strong business plan with accurate financial projects and adequate market research. Above all, they’ll want to see a strong value proposition.
In an interview with Superb Crew, McGee shared that “A key element for any business venture is the ability to fulfill a need.”
Some investors also want to see a business exit strategy. In layman’s terms, this is a plan for an investor to liquidate their stake in the startup in the future in order to draw a profit. The exit strategy needs to have a timeframe and a forecast for return on investment.
Although investors are generally investing more money in companies, they’re also investing in fewer companies. With competition for investment growing stiffer, your startup must have all its ducks in a row before approaching financers. After all, you may only get one chance to impress.