Building Your Funding Strategy: Steps to Attract Investors

Do you know that in India, the number of startups registered are 99,371 in 2023 which is a 13.6% increase from the previous year, when there were 87,500 startups. However, the startup ecosystem in India is also very challenging, as 80% of startups fail within five years, and the main reason for this failure is the lack of funds, as 47% of startups fail due to a lack of financing.

The types of funding includes - Seed funding, Startup Funding and Growth Funding. In each type we need funds to raise for the operations and expansion of the business.

One of the most crucial challenges that startups face is raising funds to grow and scale their businesses. Without adequate capital, even the most innovative and promising ideas can fail to reach their full potential. However, raising funds is not an easy task. It requires careful planning, preparation, and execution. In this article, we will discuss some steps that can help you build a funding strategy in startup funding that attracts investors and maximizes your chances of success.

First let's dive into some important questions that come to our mind related to funding.

Is funding for a start-up necessary?

The decision to seek funding should be based on the specific needs and goals of the startup, as well as the founders' vision for the future of the business.
There are some startups that require significant capital investment in order to develop and launch their products or services, while others may not require much funding at all. Startups that require a large investment in research and development, infrastructure, or inventory may need funding to get off the ground. On the other hand, startups that are able to generate revenue quickly and with minimal investment may not need external funding to get started. These may include service-based businesses and online marketplaces.

Though it’s worth to note that as funding will speed up the expansion and growth plans, however, without a sustainable idea and an idea which is solving a real life problem, funding is of no use. An entrepreneur should not rely on funding to grow the business.

It's important for founders to carefully consider whether or not funding is necessary for their startup, and to weigh the potential benefits and challenges of seeking investment. While funding can provide resources and support for growth, it also has some challenges, such as equity ownership or repayment terms.

After careful accessing weather your venture would need funding or not, it is the time to start planning and chalk out all the relevant steps:

Step 1: Determine how much you need and why

The first step in building your funding strategy is to determine how much money you need and why you need it. You should have a clear and realistic estimate of your current and projected expenses, revenues, and cash flow. You should also have a detailed business plan that outlines your vision, mission, goals, market opportunity, competitive advantage, product roadmap, customer acquisition strategy, and growth metrics. This will help you justify your funding request and demonstrate the return on investment for potential investors.

Step 2: Identify your funding options and sources

The next step is to identify the different types of funding options and sources that are available and suitable for your startup stage, industry, and goals. Some of the common funding options are:

Equity financing: This involves selling a portion of your company’s equity in exchange for capital. Equity investors usually expect a high return on their investment and may also have a say in your business decisions. Some examples of equity investors are angel investors, venture capitalists, crowdfunding platforms, incubators, and accelerators.

Debt financing: This involves borrowing money from a lender and paying it back with interest. Debt financing does not dilute your ownership or control over your business, but it also adds to your liabilities and obligations. Some examples of debt financing sources are banks, non-banking financial institutions, government loan schemes, and bridge loans.

Grants: This involves receiving money from an entity that does not expect repayment or equity in return. Grants are usually awarded for specific purposes or objectives that align with the entity’s mission or vision. Some examples of grant providers are central and state governments, corporates, foundations, and private entities.

You should weigh the pros and cons of each funding option and source and choose the ones that best fit your needs and preferences.

Step 3: Prepare your pitch deck and financial model

The third step is to prepare your pitch deck and financial model that showcase your startup’s value proposition, traction, potential, and scalability. Your pitch deck should be concise, compelling, and clear. It should cover the following key points:

* Problem: What is the problem that you are solving and why is it important?

* Solution: What is your solution and how does it solve the problem better than existing alternatives?

* Market: What is the size and characteristics of your target market and customer segments?

* Product: What are the features and benefits of your product and how does it work?

* Business model: How do you generate revenue and what are your cost drivers?

* Competition: Who are your direct and indirect competitors and what are your competitive advantages?

* Team: Who are the founders and key members of your team and what are their backgrounds and roles?

* Traction: What are the key milestones and achievements that you have accomplished so far?

* Funding: How much money are you raising and what are the terms and conditions?

* Vision: What is your vision for the future and how do you plan to achieve it?

Your financial model should be realistic, transparent, and data-driven. It should include the following components:

* Income statement: This shows your revenues, expenses, and profits or losses over a period of time.

* Balance sheet: This shows your assets, liabilities, and equity at a point in time.

* Cash flow statement: This shows your cash inflows and outflows from operating, investing, and financing activities over a period of time.

* Financial projections: This shows your expected revenues, expenses, profits or losses, cash flows, growth rates, margins, break-even point, valuation, etc. for the next three to five years.

If you are not well versed with all the above mentioned technical jargons, please seek help from professionals, because your pitch d eck is like the cover page of your venture. It can make or break your case.

Step 4: Research and network with potential investors

The fourth step is to research and network with potential investors who are interested in your industry, stage, geography, etc. You should look for investors who have relevant experience, expertise, network, reputation, track record, portfolio fit, etc. It is important to look for investors who share your vision, values, goals, expectations, etc.

You should also network with potential investors by reaching out to them via email, phone, or social media, attending events and conferences, joining communities and groups, asking for introductions and recommendations, etc. You should aim to build trust and rapport with potential investors and showcase your passion, expertise, and credibility. There are multiple angel investor platforms available, which are segregated as per sector, company stage, location etc. Currently in Indua, teher are 125 angel investor platforms and the number is expected to reach to 200 by 2030.

How many investors should you meet in order to raise funds

There is no such defined number of investors that a startup needs to meet in order to raise investment. The number of investors a startup meets can vary depending on several factors, including the stage of the startup, the amount of funding being sought, and the industry the startup operates in.

Few factors to keep in mind:

Analyze the burn rate: the rate at which your company is spending money on a regular basis. Investors will want to know how much money you are burning through and how you plan to allocate the funds you raise. It’s important to have a realistic and sustainable burn rate that takes into account your company’s expenses, revenue, and growth plans.

Expansion Plans: Investors like founders which have a clarity that how the business will reach to the next level, inclusive of marketing, business development strategy, and how much funds will be required to do so.

It is not the number of investors but to meet the right potential investors that find your business attractive and worth investing.

Step 5: Pitch and negotiate with potential investors

The final step is to pitch and negotiate with potential investors who have expressed interest in your startup. You should prepare well for your pitch meetings and anticipate the questions and objections that investors may have. You should also practice your pitch with your team, mentors, advisors, etc. and seek feedback and improvement.

You should also be ready to negotiate the terms and conditions of the investment deal, such as the valuation, equity stake, board seats, voting rights, anti-dilution clauses, liquidation preferences, etc. You should have a clear idea of your minimum and maximum acceptable terms and be flexible and reasonable in your negotiations. You should also consult with your team, mentors, advisors, lawyers, accountants, etc. before signing any agreements or contracts.

Conclusion:
Raising funds is not the prerequisite for a successful venture, there are multiple bootstrapped ventures which are flourishing and have proved their metal. What makes more difference is to select the investors which believe in your idea, in your venture and most importantly in you. Your ultimate goal is to build a sustainable and scalable business that solves a real problem and creates value for your customers and stakeholders.