According to an analysis conducted by CB Insights on a group of 101 startups that were forced to end their business operations, in as many as 29% of cases, the reason was the depletion of financial resources. This is not surprising – without capital, it’s impossible to start and scale a business, and in times of crisis (within the organization or in its macroeconomic environment), access to financing can determine the survival of a startup.
Recent months have shown that even during economic slowdowns, finding an investor is not impossible – it is, however, often much more difficult than during periods of prosperity.
Such complications are hard to avoid entirely, but there are several measures that can increase the chances of positively closing the fundraising process, regardless of market circumstances. We will talk about these measures from an investor’s perspective in this and subsequent blog articles.
First: Healthy Foundations
“Appearance is not the most important thing” – this life truth also applies to relationships between startups and investors.
What is visible on the outside – an interesting brand, aesthetic identity, a catchy slogan talking about revolutions – often indeed determines whether we manage to capture an investor’s attention. However, other factors are decisive for making an investment decision. These often concern very basic and seemingly obvious issues. The catch is that if a company doesn’t take care of them from the beginning, “catching up” at a later stage can be very difficult, if not impossible.
So how do you build a business from the start in a way that will make it easier to convince investors? Today we’ll share what elements we ourselves pay attention to when making investment decisions.
Business Goals and How to Achieve Them?
The first step in building any startup should be defining business goals and ways to achieve them. When formulating them, it’s worth questioning every assumption and conclusion – investors analyzing the project will do the same.
Even if our intuition tells us that our idea is brilliant and we are convinced that the solution being developed will gain users, let’s answer (specifically, exhaustively, in a document) a few basic questions:
- What problem does the product or service solve?
- Who is the target group?
- How large is this group?
- How serious is the problem being solved for the target group?
- Does the product actually address the defined problem?
- Does it significantly differ from competitive solutions and what are its advantages?
- What goals do we want to achieve in terms of product, financial results, social impact?
- What results will we consider a success?
It’s worth adding that according to the previously mentioned CB Insights report, lack of buyers, i.e., not finding the right product-market fit, was the main cause of startup failure (indicated by as many as 42% of respondents). That’s why it’s so crucial to think through your product and business idea.
An investor who sees that the management team has analyzed all these issues may still, of course, assess individual conclusions differently and interpret business indicators in a different way. However, they will certainly appreciate the fact that the necessary work has been meticulously done and thus gain more confidence in the business competencies of team members.
Business Plan
..that is, translating the vision of the product or service into a document that will allow us to fully understand and objectively assess the planned venture, define key parameters, and also convince potential investors of the project. This is the second foundation of every startup project.
What things do investors look for in a business plan? It certainly must include:
- Business goals
- Action strategy and business model
- Market and competition analysis
- Financial forecasts
- Information about the managers and company team
- Risk analysis and ways to avoid or minimize them
The plan should clearly describe the management’s concept, and financial forecasts should be a clear “translation” of this concept into assumptions about financial results.
It’s also worth paying attention to ensuring that the financial model is easy to understand for people just getting acquainted with the company’s activities. At the same time, it should contain a certain minimum of information, including:
- Key assumptions about costs and revenue sources,
- Profit and loss and cash flow forecasts on a monthly basis for at least the first two years (and preferably for three years),
- Connection between assumptions and results, which should be derived from assumptions (not a separately calculated table of numbers),
- Link between sales and marketing expenses and revenues, which should be calculated as a result of sales activities (not in isolation from them),
- Inclusion of all costs and investments,
- Consideration of payment terms for revenue and cost invoices and cash flows related to VAT tax in cash flows,
- Key performance indicators (KPIs) such as burn rate, cash runway, churn, customer acquisition cost, or customer lifetime value.
The business plan is a kind of compass, setting the direction for running the company. Although it’s filled with precise analyses, forecasts, and goals, its strength lies in the clarity and transparency of the message. Solid market analysis, detailed financial model, team presentation, and risk assessment make the business plan not only a tool for attracting investors but above all a map leading to the realization of the business vision. In the case of most startups, it is also a genuine expression of the passion and determination that drive them forward.
Determining Available and Optimal Sources of Financing
Based on financial forecasts, we will be able to draw conclusions about what funds the company will need at specific points in time and what type of financing will be optimal for it.
It’s worth remembering that funds from external investors are only one of the possible forms of raising capital and often won’t be the optimal one. Therefore, it’s worth initially looking at all the possibilities of financing the company using sources such as:
- Founders’ savings or company’s own capital
- Generated profits
- Bank or non-bank loan
- EU grants
- Revenue-based financing
- Factoring
- Share issuance
- Crowdfunding
- Investment from an industry or financial investor
The choice of the target form of company financing should take into account factors such as: the nature of the business, the amount and distribution over time of capital needs, possible returns on investment, company profitability, and time of existence in the market.
The main decision-making factors in choosing the target form or forms of financing should be availability, costs, and other conditions associated with each of them (and not, for example, apparent prestige or potential publicity associated with acquiring a well-known investor brand).
As a result of such an analysis, it may often turn out that raising capital from a venture capital fund won’t be the first choice at all. As a rule, the best method of financing a company’s development is… generated profits.
However, what if acquiring a venture capital fund turns out to be the optimal form of financing for our company? How to convince the dream investor to back us?
We’ll cover that in the next post on our blog.
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