Any financing looks good. It is not necessarily so. Errors in financing the company, such as insufficient financing, can damage the startup and lead to severe future problems.
In this article, we have collected 11 startup financing mistakes other entrepreneurs have already made. Read so as not to repeat their experience.
1. Startup financing – Overcoming costs
It’s easy to get paid and think that there are many them; you don’t know how long you’ll need when you start earning on your own. Think of a business plan and think of all the necessary expenses before spending your income spontaneously. You will see how much you can use it.
2. Startup financing – not considering all financing options
Traditional methods of obtaining funding or investing include visiting a bank or using credit cards. Thanks to the Internet and solutions like PayPal, getting a loan fast with much lower interest or commission rate has become easier and more cost-effective.
Don’t forget crowdfunding – this, by the way, is not just a way to make money; it can even fulfill your idea’s goals.
3. Startup financing – Too many details
When a new idea inspires you, you are ready to talk about it for hours and enjoy the details.
This is important, but investors tend to have a more comprehensive view of the company, its niche, and your success indicators. Describe your vision in general terms and confirm your words with numbers. Understanding the industry is better than an investor. This will be enough.
4. Startup financing – transfer of rights
Often a mistake is made in the beginning because startups seek funding; they make too much equity and thus “sell” their holdings. Ideally, founders should still have a controlling stake in the business when applying for financing. Having 20% or more of the shareholders is no longer profitable. In the future, problems may arise – you will not have the right to dispose of your own business.
5. Startup financing – don’t think it’s easy
Funding seems easy to come by because you hear about the number of startups getting the injection. It would help if you sweated to get at least a small amount. There are many startups and a few investors. Do not believe the media propaganda. You have to work on this.
6. Startup financing – don’t raise funds before you need to
In any case, financing is a challenging and unpleasant task. We try to do everything by ourselves. Finally, we wait until it is too late to consider external funding for the business. You understand that at least three months will pass between the start of your fundraising and the money arriving in your bank account. And it is much more difficult to find money when you are desperate.
7. Startup financing -Get a lot of money
This has happened to many startups. It is not a good idea to have a lot of money because it causes people to make bad decisions and not feel the urgency in what they do. In any case, ask for the minimum amount you want. This is better.
8. Startup financing – High advertising costs
You may want to run multiple ads on all channels at once. But don’t do that. First, test one or two channels, analyze your capabilities and get reasonable conversion rates. Then it will be possible to pour more money into this channel.
9. Do not use a lawyer
When starting a business, it may be appropriate for some not to hire a lawyer to save money. However, investing in a lawyer from the start can save you money in the future. In particular, the attorney assures that the startup’s legal foundations are healthy and that you respect government laws and protect yourself.
10. Do not focus on profitability
Make profitability as high as growth. Although many focus on development, profit is something that comes later. Please do not do it. Self-sufficiency equals freedom. Try different business models at an early stage to find one that frees you from the persistent downside and the need to invest.
11. The wrong investor
Attracting financing for a business is a complex task in itself. If you urgently need money, you can draw any investors. At this point, money is essential to you, not human qualities. You will then understand that the wrong people can add up to more problems for you if you work with them. Just like employees, investors must be compatible with your culture.
Benefits of financing startups
The attractiveness of this sector is primarily due to the profitability of the projects. An injection of capital into a promising young company promises good returns. At the transaction stage, the company’s shares have a minimum value. As the business grows, so does its price. You can record income when you move into the intensive growth phase. However, the investor can retain the rights to a part of the company and receive profits.
An obvious benefit to investing in startups is cooperation with the best representatives of the business environment. The most efficient and creative entrepreneurs are entering the market. They are not afraid of difficulties; they efficiently use information technology and are continually learning. This approach becomes the driving force of the project.
Disadvantages of Startup financing
The worst disadvantage of financing newly established companies is a risk. The probability of a complete loss of capital is very high. According to statistics, only 3% of the efforts were successful. The situation is exacerbated by the lack of clear legal regulations and insufficient verification by the counterparties.
At the end of 2016, any registered user of a niche site had the right to give an idea. The prerequisite was the availability of a step-by-step implementation plan. However, the number of dummy initiatives has not decreased. The authors provide no guarantee of success, and income is probabilistic.
Experts point to other Disadvantages:
1) Lack of manager interest
If the project collapses, the investors lose far more than the regulators. Failure will force them to get a job, discover something new, and find a livelihood. Investors suffer heavy losses. The best option is to use your capital. It is tough to find such projects.
2) Illiteracy of the participants
The development of public investment was a severe issue for regulators. Most of the people who invest in startups do not have the necessary knowledge. Often, the parties generally cannot determine the exact purpose of the cooperation. Disputes between entrepreneurs and emerging entrepreneurs occur regularly. This dramatically reduces the attractiveness of the steering.
The attempt to overcome the problem was private schools. Training is organized directly on virtual sites. However, the quality of this training leaves much to be desired. Management focuses on benefits, and users don’t see the full picture.
3) Lack of qualitative analysis
Risk funds carry out a comprehensive evaluation before financing a project. Specialists analyze the market situation, check the proposed scheme’s consistency and consistency, and receive certified lawyers’ opinions. Junior investors do not have such an opportunity. They are investing their money, guided only by intuition. The decision is influenced by the reliability of the offer and the actions of other investors. The approach does not reduce the risks.
Hence, investing in startups poses several problems. Investing money here is only possible with some knowledge. The player will have to carefully study the essential elements of the job, create his checklist, and choose the most attractive and clear sectors. It is also necessary to remember the legal protection. Before cooperation, the text of the agreement must be carefully read, and the prevailing practices studied. In deciding to enter the market, the owner must be prepared for a complete loss of capital.
There are many forms of startup financing. Investors are interested in making the most profitable investment for their funds, so many support promising startups in the initial stage and the development process. The purpose of financing startups, in some cases, is a socially significant activity and improving public welfare. Socially oriented projects use government cash subsidies. Philanthropy is another incentive to support entrepreneurship related to the free provision of money in grants and donations.
In practice, two basic approaches are implemented to invest in entrepreneurial business ventures. The first is the payment of grants to implement startup ideas. The investor’s interest, in this case, is focused on intangible gains.
Emerging mutual funds and individual investors are guided by future profits from initial investments in a business venture. This is the essence of the second approach to financing startups. Investors agree to terms for transferring private funds to entrepreneurs to implement startup ideas. As a reward for the advance, the businessman usually offers a share of the project’s future profits or the right to partial management of the project. The condition can also be arranged in the form of a standard loan form: the borrower agrees to repay the debt with interest for the period of use of the creditor’s funds.
A variety of Startup financing sources
The above forms of fundraising indicate a diverse source of funding at each stage of the project. The prime investment agents are divided into three groups:
- Private equity funds.
- Business angels.
Startup financing – Private equity funds
They are institutions that specialize in investing in assets that are attractive to investors in promising projects that generate medium and long-term income. Venture capital funds focus on supporting the development of innovative startups. Such investments are very risky. However, before making an investment decision, the investor evaluates the entrepreneur’s project in terms of the likelihood of success. To cover the risks, funds are immediately allocated to a series of projects in various fields. One of the tasks of venture capital funds is to control the activities of innovative startups.
Startup financing – Business angels
Business angels are private investors. Funding startups are the same as for mutual funds – the ability to put their own assets into profit in the future profitably. But the probability of getting paid from such a source is much higher. Business sponsors are often not qualified enough to objectively assess investment risks. An entrepreneur’s idea can make an adequate emotional impression, and startup financing is provided.
Business sponsors are less demanding in terms of a quick return on their investment than formal mutual funds and commercial banks. The former is aimed at long-term investments and is therefore sympathetic to temporary difficulties in the initial stages. Business sponsors are interested in the progressive return on their investment and manage only their own money.
The Internet as a viewing platform
The volume of online transactions increases every year. This information is also essential for entrepreneurs seeking funding to implement large-scale projects.
What is crowdfunding?
The world wide web allows you to find investors to fund a startup among ordinary people interested in the idea of an entrepreneur’s business. On crowdfunding sites, it is proposed to purchase “shares” of a future project entitled to receive a subsequent reward for the investor from a startup. If the project intends to launch unique products, the “contributor” has the opportunity to receive a copy as a gift. Funds are transferred by the parties involved, including for free. Crowdfunding is also an opportunity to draw the attention of a future public goal to an ongoing project.
For people to believe in your success and realize the value of their investment in your startup, it is vital to articulate the horizons and significance of your idea clearly. Raising funds needed to launch the project provides it with external attractiveness to the investor. When placing your fundraising ad on a crowdfunding platform, it is essential to highlight all the business idea’s positive features. The rule of thumb: Any statement about goals, implementation methods, and future success criteria must be specific. The numbers and graphs clearly show your confidence in success – remember this rule.
Fundraising through the stock market
To attract actual cash payments from abroad, you can seek help from the stock market.
The stock market implies having agents interested in obtaining the financial assets that yield the highest return with the least amount of risk. Several different instruments with different degrees of liquidity are offered to choose from: stocks, bonds, derivatives, etc. Investors buy the proposed assets, guided by one of two goals:
- Resale of assets at a higher price in the future.
- Long-term investment to earn a steady income.
IPOs as a way to attract investment
A common way to initially attract external funding is through an IPO (initial public offering) – an initial public offering of a company’s shares on the stock market. By purchasing it, the investor contributes to the startup’s capital. Initials run relatively “young” businesses and already developed companies. A public offering of shares is laden with risks of losing control over project management when a significant portion of the capital is concentrated in one shareholder. Junior entrepreneurs should avoid this.
Bank loans and government grants
Keep in mind that this method of obtaining financing is linked to a formal procedure for “protecting” a business. Banks are the least risky source of investment. Therefore, as a guarantee of solvency, the borrower has to provide information on the condition of assets (real estate and other assets), as well as the availability of fixed profits. Depending on the terms, a commercial bank loan means a total or partial exemption from payments at the initial stage of the project. This allows the contractor to reduce costs in the project creation process.
The loan’s interest rate depends on the amount of money borrowed and the objectives for obtaining the loan. Startups are provided at the initial stage of implementation with medium amounts. In the future, the bank will review the project’s risk score based on the success of its launch.
Public financing for startups
In Israel, several large grants and grants programs are currently being implemented for entrepreneurship projects. The state policy is related to supporting entrepreneurship. These organizations support startups, and the priority areas at the moment are innovative and agricultural ventures.
The state guarantees the activity of its investment funds. Funds are competitively redistributed. Innovative startups are more likely to receive government support, as budget policy’s priority goal is to develop high-tech industries related to high technologies.
To raise funds in the first stage of implementing a business idea, it is necessary to convince the investor of the project’s future success. Depending on its size, the entrepreneur chooses a source of funding for the startup. It is vital to consider the peculiarities of particular forms and financing sources so that investments with lower costs can achieve income in the short and medium-term. An entrepreneur always relies on his strengths, so he must correctly calculate risk at every stage of implementing startup ideas.
A startup can be called any company in the process of being incorporated or has just started its activities. Such an organization often brings an innovative idea in the field of Internet technology, medicine, or science. All entry-level entrepreneurs need financing to get started.
Usually, the startup’s face is a young man, between the ages of 25 and 30, who has an opinion on carrying out some business process. He has an original idea, which will be profitable in the future. And to implement such a scheme, money is needed. Therefore, it is advisable to attract investors who will contribute to the establishment of the business.
Innovative technologies and startups
During the rapid development of the Internet and science, many business operations take on a modern look. A startup can involve developing a new type of service or product and improving the existing ones. Some forms that may be useful in selling goods or in administrative activities.
Currently, the following sectors are subject to the most innovation:
- Services field.
- Information Technology.
Developing new models in any of them often implies the profit that companies can get and the advancement they can gain and take a leading position in a particular field.
Each beginning has its life cycle and goes through a series of levels.
Startup financing – First level
This is the same idea. It is necessary to study it carefully. Define your target audience, develop a business plan, analyze your competitors, and set expectations.
Startup financing – Second level
Create an initial product or service that will be a real test in the future.
Startup financing – Third level
Minimal product development becomes an indicator for understanding whether an idea will be successful or not.
Startup financing – Fourth level
Central product creation and implementation. Market acquisition and increased influence on relevant market segments.
To carry out this whole process, responsibilities must be shared. Only the businesses where the entire team works will be successful. Therefore, it is crucial not only to find investors but also to have partners in various activity fields – from marketing to marketing goods or services.
For each stage, you may need a certain amount of investment. If initially, this amount was equal to a few thousand dollars, it increases hundreds of times. First, you need to find an investor who is a business owner. Usually, this is an investment of up to a million dollars. Banks also offer small investments.
Often, pumping money into a startup implies investors gaining a share of the rights. Such work is very beneficial in the long run if the business is booming.