Errors to Avoid when Sourcing Start-Up Funding

For the vast majority of new business start-ups, the most critical piece of the puzzle when looking to set the wheels in motion is funding. Even with the most outstanding ideas and all the dedication in the world, it all comes to nothing if you cannot secure the essential capital to get things off the ground.

Which is exactly why it’s so frustrating that so many would-be start-ups get it so wrong when seeking funding. It’s hardly an easy job in its own right – shooting yourself in the foot in the process not exactly being the best way to go.

So in the interests of those who’d prefer to learn from the mistakes of others, here’s a brief introduction to five small business funding flounders to avoid at all costs:

1 – Limiting Sources

First of all, given the fact that there are dozens of avenues to explore when it comes to available sources, why limit yourself to one or two? So what if your loan application and grant request were turned down – there are still plenty of options on the table. From sponsorship to peer-to-peer lending to crowd-funding and the every-faithful credit card, limiting yourself to just a few potential sources is nonsensical.

2 – Asking For Too Much Money

The problem with requesting insufficient money demands no real explanation. However, asking for too much money can be just as problematic. The reason being that unless you can comprehensively justify every penny of the funding requested, it’s unlikely anyone is going to agree to provide it. Not only this, but the more you ask for, the more challenging it becomes to secure the cash in general. Your request should be tailored meticulously to your goals and your needs – it’s as simple as that.

3 – Not Presenting Credible Figures

When dealing with potential financers, you need to speak the language of numbers. More specifically, you need to be able to present believable and inspiring figures/projections of truly flawless quality. One of the biggest mistakes many start-ups make is that of fudging their figures to such an extent that when presented, they come across as far too unrealistic or garbled to take seriously.

4 – Incomplete or Absent Business Plan

If you don’t have a comprehensive business plan to show prospective financers, you’ve no chance. You can pitch your idea and your greatness all you like, but it’s the content of your business plan that will show them a) how you plan to bring your vision to life and b) why they should back you. Fail in either of these capacities and they won’t even think twice about turning you down.

5 – Expecting Overnight Funding

Last but not least, the road to securing small business funding tends to be longer and more complex than most expect. Delays are simply part and parcel of the process, though even in the instance of a smooth and successful funding request it can take months to receive the funds. If you are banking on a near-immediate payout, you might want to think a little more realistically. Don’t find yourself stuck in a time-critical situation having expected a prompt pay-out, which in reality most likely isn’t going to happen.

Why do we need a Business Plan?

Business Planning is a vital tool whenever a proposal is put forward for funding internally or externally. Furthermore, a business plan can be used to attract new talent to a start-up. Existing businesses can make use of the planning approach as a basis for the long term management control. It is important to construct a business plan whenever:

• A new business is to be formed and capital is required.
• A new investment project is being proposed and a maximum capital need must be specified.
• A new product line or project is being proposed.

A Business plan consists of a number of integrated elements covering the product or business proposal, the objectives that the company wishes to achieve, the strategy for delivering those objectives, and a range of marketing and organisational issues that flow from the strategy described. All of this will then be summarised into a financial plan that lays out the implications of the proposal in terms of cash flow, financial requirements, project financial statements and a range of planning rations and financial performance targets.

It is important to note that what matters for a business is not so much the plan itself but the process of creating it. Good business planning allows managers and entrepreneurs, in the case of new business ventures, to work through implications of what they are proposing and to minimise the impact of the law of unintended consequences.

This is why most banks, finance houses and investors insists that company's seeking finance have in place an effective business planning processes.

100Q - 100 Key Questions Investors Ask Start-ups When Pitching

Compendium Of Over 100 Questions Investors Ask Start-ups When Pitching

When it comes to fund raising for your start-up, there are most likely over 100 questions investors ask start-ups during their pitch in order to not only assess your business idea and the market but also to see how comfortable and prepared you are to take on the challenging goal you set for yourself.

Alongside a number of questions investors ask start-ups are aimed at the product/service itself, quite a few questions will centre around yourself and your team. They will also check up on the interaction between the individual team member Argus-eyed. We have compiled the top 100 questions here based on years of screening and consulting start-ups.

So better prepare yourself as if you are sitting your final exams. Don’t overdo it though, for if you come across as being too constraint, your confidence will crumble. Since people often mistake confidence for competence, a person with an assumed low level of confidence might be not invited for another chat again. Investors are human being after all and who doesn’t like a chat that goes with the flow?

Be prepared, not scared!

Smart Business Planning will prepare you for your pitch! Simply book a Start-up Advice Session by clicking here.

BREAKING THE ICE

At the start of the meeting, you will have the usual small talk. It is recommended that you come up with a few trending topics in the local investment world. Once the conversation flows they would want to get a clear top-level overview as to what the company does, the market size, the total addressable market size, why your idea is outstanding and why do you think it may lead to a large exit. So expect the following:

• What big problem does it solve?
• How big is the market opportunity?
• What does the company do?
• What is unique about the company?
• How big can the company get?
• Where are you headquartered?

THE MARKET

Yes, we all know the market size is millions of euros with millions of consumers and will grow at a double-digit rate of X % over the next years and sure, this is why this couldn’t be a better time – of course! Instead of the usual million-euro-market sales talk, at this point investors would rather want to learn about the size of the total addressable market, learn about your sources, whether it be a industry report such as McKinsey, E&Y, etc, and understand a few historic trends plus future predictions for the very segment you intend to target.

• Why does your company have high growth potential?
• How did you arrive at the sales of your industry and its growth rate?
• What percentage of the market do you plan to get over which period of time?
• What is unique about the company?
• What is the actual addressable market?
• What sources did you use for your research?

TEAM, FOUNDERS, GROUP INTERACTION

It is important to demonstrate that the team has got a clear structure and leadership. If the investor asks “Who is the CEO?” and everyone shouts “That’s me!” then he will be as concerned as when everyone just shrugs. So make sure you have got a leader, everyone has a defined role, and one leads the pack. The investors will take a particular interest in the leadership qualities of the CEO as well as in his track record and also qualifications. An MBA from a top-tier b-school comes in handy but also significant experience. This could be having served in the army, having led a sports team, having been the president at a university society, captain of a rugby team, etc.

• Who are the founders and key team members?
• How do you plan to scale the team in the next 12 months?
• What motivates the founders?
• How many employees do you have?
• Why is the team uniquely capable to execute the company’s business plan?
• What key additions to the team are needed in the short term?
• What relevant domain experience does the team have?
• What university / business school did they graduate from?
• What networks do you have access to?

YOUR IDEA/PRODUCT/SERVICE

At this point you will have to demonstrate clear knowledge about your product/service/idea, explain why it’s unique, what are the USP’s, what the value proposition is (are), and what exact problem is it intended to solve. Note: Don’t mistake features for USPs! This is a common mistake and you have to be clear about what is outstanding and what is just another stone on the pile.

• What are the two or three key features you plan to add?
• Provide a demonstration of the product or service.
• What have you learned from early versions of the product or service?
• What are the key differentiated features of your product or service?
• What are the major product milestones?
• Why do users care about your product or service?
• How much did you spend on the MVP?
• Do you have any patents pending?

THE COMPETITION

Human survival strategies oscillate between competition and collaboration. In your case, you are facing a lot of competition in the market. If not by direct, then by indirect competitors. Make sure you are aware of your top 5 direct and top 5 indirect competitors and that you are aware of their history, failures, markets, and route-to-market strategy. If you truly believe there is no competition at all, be prepared to be show the door straight away.

• What are the barriers to entry?
• Compared to your competition, how do you compete with respect to price, features, and performance.
• What gives your company a competitive advantage?
• What advantages does your competition have over you??
• Who are the company’s competitors?
• Why do you want to do develop something that has competitors?
• Can you tell me the top 5 direct as well as 5 indirect competitors?
• What is the history of your competitors?
• What could be a competitive advantage in a thick or under served market?

ROUTE-TO-MARKET, MARKETING AND CUSTOMER ACQUISITION

The investor wants to know how much consideration you have given to taking your product/service/idea to the market, if you know your customer, if you’ve conducted focus groups and developed a strategy upon the results, what your marketing message/story may be and what route-to-market strategy you have mapped out.

• What is the typical sales cycle between initial customer contact and closing of a sale?
• What advertising will you be doing?
• What is the company’s social media strategy?
• What is the projected lifetime value of a customer?
• What is the cost of a customer acquisition?
• What is the company’s social media strategy?
• What is the company’s PR strategy?
• How does the company market or plan to market its products or services?
• Have you done any customer development?
• Have you done focus groups and what are the results?

TRACTION & ADOPTION

A start-up with initial traction is well perceived and therefore showing off a little here doesn’t go a miss.

• How many user do you have?
• What is the average churn rate?
• What is the daily usage rate?
• How many recurring users/customers do you have?
• How many downloads/subscriptions/sign-ups/likes/shares, etc?
• What is your traffic?
• How many visitors?
• What is the social impact?
• Any celebrity endorsements?

DOWNSIDES, RISKS AND THREATS

Although, they will work it out for themselves, here they are testing your sense for reality and check up on your competency in taking calculated risks.

• Are there any product liability risks?
• Do you have any regulatory risks?
• What legal risks do you have?
• What do you see are the principal risks to the business?
• Is it illegal what you want to do - copyright???
• Is there anything that can pose a potential risk in the future as in changes in regulatory frameworks?
• How is the risk distributed across the team?
• Is there any way to increase down-side protection?
• Is there a way to shift risks around?

THE EXIT STRATEGY

Don’t forget that you are begging someone to lend you money and therefore the creditor (investor) will want to know when and how he will get his money back.

• How will the valuation of an exit be determined given market comparables?
• Who will be the likely acquirers?
• When do you see the exit happening?
• What is the likely exit – IPO or M&A?
• Who do you want to sell to?
• How much will my return be?
• Do you have any examples of comparables?
• Where do you see yourself financially in 5 years down the line?
• Are you in talks already?

PATENTS/INTELLECTUAL PROPERTY/TRADEMARK/ASSETS

For most businesses intellectual property is a key to success. They are also regarded as assets of the company and can be very important when it comes to liquidations, acquisitions, M&A’s etc.

• Would any prior employers of a team member have a potential claim to the company’s intellectual property?
• How was the company’s intellectual property developed?
• What comfort do you have that the company’s intellectual property does not violate the rights of a third party?
• What key intellectual property does the company have (patents, patents pending, copyrights, trade secrets, trademarks, domain names)?
• In what legal jurisdiction is the IP held?
• Can the IP be liquidated?
• Are you infringing the IP of another company?
• Are you looking to acquire IP from distressed companies that may add value to your company?
• Would you opt not to have a patent pending in order to be able to remain in complete stealth mode?

YOUR FINANCIALS

Be prepared at this point to be able to walk the investor through your financial model, P&L and balance sheet. As investors do it with models, they would want to dig deep here. They may opt for a separate session and bring an analyst along so better spreadsheet up!

• What are the key metrics that the management team focuses on?
• What are the factors that limit faster growth?
• What are your unit economics?
• How much burn will occur until the company gets to profitability?
• When will the company get to profitability?
• How much of a stock option pool is being set aside for employees?
• What future equity or debt financing will be necessary?
• How much equity and debt has the company raised; what is the capitalization structure?
• What are the key assumptions underlying your projections?
• What are the company’s three-year projections?

THE FINANCING ROUND

Finally, the investor is keen to learn how much money has been raised so far, how the company has been financed, how the equity structure looks like, how may other investors may be involved, what the valuation may be, what you intend to use proceeds for and whether there are any tax incentive schemes such as EIS is in place.

• What milestones will the financing get you to?
• What is the planned use of proceeds from this round??
• Will existing investors participate in the round?
• What is the company’s desired pre-money valuation?
• How much is being raised in this round?
• How much equity is being held by whom?
• Are there any convertible loan notes on the company?
• Have you made use of EIS?
• Have you done crowdfunding?
• Has an accelerator/incubator put money in?

The Importance of Smart Business Planning

Business plans are neat, prescribed, determined and manageable.  You figure out what to do and then do it. But not all types of plans have that level of precision.  In a fluid, unpredictable environment you need to have a very different understanding of plans and planning.  A case in point is military strategy.

Helmuth von Moltke, also known as Moltke the Elder, lived between 1800 and 1891. He was a German Field Marshal and is credited with creating a new approach to directing armies in the field. This entailed developing a series of options rather than simply a single plan. Moltke the Elder held the view that only the commencement of any military operation was plannable. He famously stated that “no plan of operations extends with certainty beyond the first encounter with the enemy’s main strength.” This has also been popularly interpreted as “no plan survives contact with the enemy.”

Like military strategy, business strategy is developed and applied in a fluid, unpredictable environment, and the distinction that Moltke draws between strategic planning and the business plan is very pertinent for senior executives charged with crafting a company’s strategy.  All too often, I find, executives seem to become complacent with their current business.  As such, the trick is to help them create a strategy that will actually work which lies in getting them to rethink that view.  What does that involve?  Let me share with you a few principles I’ve learned from my experience in facilitating Smart Business Planning sessions.

Think of the plan as a guidance tool

The problem for many managers is that their expectations are all skewed from what can be realistically achieved via a business plan. They anticipate that by doing the necessary analysis and writing down how their business will succeed in the world will be converted from uncertain to certain. In their eyes the business plan becomes a device for control rather than one of guidance. They’re not comfortable with the fluid and uncertain Moltke concept. This can manifest itself as “we’ve given up on business planning.” This emanated from a CEO whose experience in writing “it” all down was that he got it all “wrong” as things changed rapidly. In other similar situations executive teams find themselves simply ignoring any document that is produced.

Look for disagreements and toward the future.  

Even though your plan is liable to become immediately irrelevant, you still need to invest in writing it up.  Why?  There are two reasons.

The first is to surface disagreements that may otherwise remain hidden. You can have all the discussions you like with your fellow staff and think that your management team is in agreement, until you actually distil these discussions in a written document that people have to sign off on. It’s in the crafting of your organisation’s position that you realise that, well no, we’re not all on the same page.

The second reason is that it provides a platform from which change can be leveraged. This line-in-the-sand concept may seem paradoxical but the very process of preparing the plan has you thinking about the future and assembling resources. Moltke wasn’t advocating not having a plan to start with but that the plan itself and the planners needed to be flexible because it generates preparedness.

Focus on the organisation and key stakeholders, not individual actions 

A plan can’t be “strategic” if it’s simply about action by individuals. While action is fundamental to implementation and success, there’s another level above that — the organisation level. In my experience most managers, operating as they do inside their organisation, aren’t fully cognisant of this important distinction. This can have them launching prematurely into who, what and when or, at the very least, unconsciously crisscrossing between the organisation and individual levels. Business strategy operates at the corporate level while action functions at the individual level. Remain aware of this underlying logic and keep a firm focus on your organisation and its relations with its key stakeholders.  Develop business strategy for each stakeholder in turn but also acknowledge the causal link between them.

Assume the plan is a work in progress 

A business plan is not a set-and-forget instrument. It’s a living and breathing document that guides decision making and helps marshal resources. When managers talk about “giving up on business planning” I suggest that they haven’t thought through how to keep their plan fresh. The fact that circumstances are changing rapidly is a very good reason to visit their plan regularly. How regularly? This varies by industry, of course, but my general recommendation to most clients is monthly. Your executive committee may meet more frequently, perhaps weekly, so put aside the first meeting of each month for a plan review. This allows you to not only update the document due to changed conditions but to also go through the actions that were scheduled for completion as part of the execution process. Make your agenda item “progress against business plan.”

Moltke the Elder wasn’t in business nor born in the modern era. Yet my guess is he’d have made an excellent keynote speaker at a conference on our modern obsession, “disruption.” He understood that the world doesn’t stand still while we plan. He also appreciated the importance of planning’s role in preparing for change. Your business plan is an essential device in navigating disruption’s headwinds.