What To Consider Before Your Startup Funding Round
To grow a successful startup, you need sufficient funds, but raising capital is no simple feat. The market is becoming increasingly saturated with new ideas and budding entrepreneurs, so how can you ensure you get funding for your startup? To boost your chances of getting sufficient funding for your startup, you need to study the many factors that come into play and that influence startup funding.
7 Factors That Impact Your Startup Funding
As a founder, you should consider these 7 factors that influence startup funding.
1. Amount of Startup Funding
The very first thing you need to consider is the amount of funding your business requires. You should have a realistic idea of the figure you need to scale during the funding period. Underestimating your cashflow can be detrimental to your business
You must carefully calculate your sum expenses and generate a financial picture to figure out how much funding you will need. To come up with a realistic number, gather and analyze your income statement, balance sheet, and cash flow.
Each business requires a specific amount of capital to get started, depending on the product and industry. It can be helpful to research the typical sums of similar startups or products to get a better idea. According to Crunchbase, the average seed round for a startup in the United States in 2021 was around US$4M, but each round for every individual startup can vary anywhere from US$1M to hundreds of millions. Fundraising startups will usually need to undergo a series of funding to grow and expand their operations.
2. Type of Startup Funding
Once you figure out the amount of funding your startup requires, you can select the appropriate funding type.
Most startups require a large sum and often benefit the most from partnering with a venture capital (VC) firm. Other options include angel investors, bank loans, crowdfunding, borrowing from friends and family, bootstrapping, accelerators, and grants. Study each option carefully before you make your decision. A financial partner can make or break your startup so choose wisely. Founders may also combine various funding options depending on the terms of each.
3. A Sound Business Model
The next thing your investors will want to study is your business model. No startup can take off without a predetermined plan that details how you will achieve your business objectives. A sound business model will position you as a confident leader who has built a vision surrounding his business and has also crafted a viable plan to go with it.
Simply put, your investors want to know how you will be using their funds and earning a profit.
4. Traction to Your Product/Service
Investors will be most interested in hearing about the potential product-market fit before getting onboard. Sometimes even the most well-planned startups fail to take off and raise capital because they can’t prove that there is a high enough demand for the product or service. Entrepreneurs should emphasize and demonstrate their product or service’s potential for mass adoption to get investor’s attention and build credibility. Raising capital from anywhere is essentially a loan that must be paid back, and investors want to know that your business and product will get them their ROI.
You should also highlight that you have a customer acquisition strategy in place. The more prepared you are, the better. Before selling to customers, you must sell your vision to investors. So, showing your product’s potential as well as presenting your customer acquisition strategy to potential investors will give them more confidence in you and strengthen your chances of receiving funding for your startup.
5. Your Financial Status
Another major factor to consider when generating funding is your present financial health. Above all, you should have a cash flow in place that serves as a measure of your company’s financial health. Your startup’s financial health will significantly impact your startup’s ability to scale and grow and therefore impact the amount of capital you raise and the investors you attract.
6. Your Ability to Repay Loans
Before you can have investors flock in for funding, study your ability to repay loans. It is always recommended to have a loan repayment plan in place to pay back your investors when the investment period comes to a close.
Your loan repayment plan should consider how much you will be borrowing, the exact terms of your loan, the interest levied, and how much you can repay monthly, and then choose a repayment schedule that works for your startup.
7. The Current Market
Finally, you must consider the current market conditions and how it will affect your startup funding process. Bull and bear markets can affect investors’ willingness to invest, the time it takes to close a round, the size of the round, the terms of the investment, and the degree of involvement of your VC partner. As a founder, you should be conscious of the potential impact of the market situation on your startup’s financial wellbeing, making sure to be more conservative in a bear market.
Getting funding for your startup isn’t easy; a lot of factors directly and indirectly influence your funding process. Considering the factors above, you can get a rough estimate of whether or not you are well-positioned to garner enough funds for your startup.