The Challenges Of Raising Capital For Small Businesses: And How To Overcome Them
Very few small businesses can make it on self funding alone. Not everyone has millions of dollars saved up to start their company off with full coffers. Luckily with startups popping up left and right, there is a lot of attention on who raised how much money how quickly; this can give you and your business an idea of what it can accomplish. However, there’s a lot to learn before running a successful fundraising campaign, and there are a lot of ways to mess it up.
The first mistake: thinking it’s easy. It seems like there is news every day detailing a startup’s success at raising millions of dollars even before its fundraising period closed. But laying the groundwork for raising capital is just as important—and intensive—as laying the groundwork for your company. In the same vein, it also takes a tremendous amount of support.
Regardless of whether a company is attempting to raise just a small amount of startup cash, or millions of dollars from investors, the following challenges and mistakes could pop up at any time.
Ignorance Isn’t Bliss
A business’s best chance of reaching its fundraising or investor goals is by being as educated as possible before jumping in. A hastily-made finance plan likely will not get your company where it needs to be. The following are a few things leaders might overlook or not spend enough time researching before jumping into the fundraising pool.
Businesses are not clear on their vision. It would be very difficult to expect someone to invest in a company when the person selling that company is not convincing enough with their vision. Investors want someone who is passionate and articulate about the foundation on which the company is founded.
And your investors are not the only ones who have to buy your company’s story. From the top down, your workforce has to be convinced as well: your own employees are your biggest assets when it comes to purporting your vision and company culture. By putting your vision at the front and centre of every pitch for raising capital, you are demonstrating to everyone from an early-stage investor to a top-tier VC firm that you and company are committed to making it a reality.
Businesses are not educated about the market. Who is going to be buying your product and service? What hole does it fill in the market? How big is your potential audience? How quickly can it grow? A company needs to be able to answer these questions—along with dozens of others—to provide an adequate big picture to investors. The most important question you as the fund raiser need to answer however is how quickly your company and investors can get a return on the initial investment. Don’t forget to talk to everyone—from your parents to customers, mentors, industry analysts and more—to validate the market opportunity.
Businesses are not sure how much money they actually need. Investors do not just need to know how the money will be spent but rather how much money will be needed. When asked, responding with “Well, I think about a million would do it,” is not detailed enough. Not only should you know exactly how much you need, but you should also know why you need it. Why do you need more marketing guys at this point? How much of the money will go to branding or rebranding efforts? Production? Training? Hiring? Know the answers to these questions before stepping into the boardroom.
Businesses are lacking qualified leaders in key positions. Depending on where a company is at the time of the fundraising efforts, it may already have a fully-functioning work force. However, like many startups and small businesses just getting their footing, it may only be a couple of people attempting to pull everything together. If that’s the case, get your long-term leaders in place pronto.
A competent, entrepreneurial-minded team will demonstrate the passion and drive it takes to succeed to the rest of the staff, as well as potential investors. By having a trusted team around you, there are several people to see opportunities from different angles, help answer the tough questions and to provide support in the toughest moments. You cannot—and more importantly should not—go into the fundraising process alone.
Understanding Lenders & Investors
First, it’s important to understand which type of fundraising the business is going to attempt.
Lenders loan money for a period of time and expect to be repaid with interest. They are interested in risk management and what capacity the business has to repay the credit that has been advanced to it. Businesses should seriously consider going this route if the owner is planning on running the business for the rest of the foreseeable future. Raising outside capital lets people know that eventually a business owner might be interested in selling. When pitching your fundraising needs to lenders, make sure you have a financial plan in place that details debt repayment.
Investors on the other hand are interested in buying up a piece of the company, with long-term capital gains acting as the motivator. As the business’s stock increases, so does the investor’s return. There are several different types of investors, but one that gets a lot of media attention is the venture capital investor; this particular type of investor is looking for a business that grows quickly into a large and valuable asset.
One of the most frustrating situations you can encounter during this process is the “maybe commitment.” Often, investors are not interested in being the first and want to see what other high-profile, sophisticated investors have already committed to your cause. Investors do not operate under the same sense of urgency those at the fundraising company do, so monetary commitments will most likely happen on their timeline. If you and your company think this might be a cause for concern in your situation, consider running crowdfunding efforts congruently.
Understanding Platform Options
Crowdfunding can be the sole way a business raises funds, or it can also supplement investor and lender commitments. Those looking for smaller amounts of money can appeal to consumer-use platforms like Kickstarter; entrepreneurs looking for fundraising efforts to surpass $1 million would have better luck on equity crowdfunding portals. Australia has several different crowdfunding options like the Australian Small Scale Offerings Board (ASSOB), ChipIn, CitiNiche, FieldTheory and iPledg, among others.
There are hundreds of options and ways to go about raising the capital you need to make your company successful. Thorough, diligent research into these options, a strong vision and a passion for what you do will help you and your business reach your fundraising goals.
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