It is estimated that it costs roughly $80,000 to operate a business in its first year. That being said, most entrepreneurs obtain their initial funding from self-funds, and/or family and friends which is typically $10,000 or less. Considering the initial upfront costs coupled with expectations for growth or cash shortfalls, entrepreneurs will need to obtain outside financing at some point.
Capital providers such as angel investors, venture capitalists, family offices, and accelerators/incubators review thousands of proposals. Of those proposals, only a handful receive funding. And of those that receive funding, a few of those ventures are profitable and provide an ROI. Against this backdrop, the odds of receiving funding are not stacked in the entrepreneur’s favor at the outset. However, the goal when obtaining funding is to strategically stack the deck in the entrepreneur’s favor.
This requires entrepreneur’s to first think about the totality of their business and not simply in terms of providing a great idea for a product or service. The entrepreneur needs to view the providers of funds as they would a customer and tailor their business pitch accordingly while focusing on 1. Investor’s objectives and 2. The exit plan for the start-up.
Investors typically find deals with people they know, like, and trust which is why it is critical to network. Additionally, investors look at the charactertics of the founder and qualities of the team more so than they do the economics of the business because it is the team that has to navigate the array of challenges and likely pivots going forward. It is highly important to be coachable (not defensive) because the providers of capital value their time, resources, and knowledge more so than their money. Even with the best business plan and pitch deck there will be many “no’s” which is why it is important to cast a wide net.
Lastly, often overlooked, it is critical to focus on managing downside risk. Reducing risks inherently increases the value of your business and makes investors feel more secure in funding your start-up because they understand how to recoup their investment should it fail.