It’s now easier than it has ever been to found a business. This has opened up the possibility for many to be entrepreneurs, and the availability of capital also enables many new ground-breaking ideas to get funded.
This has somehow led to a belief that the first thing to do, when starting a business, is to raise capital. For many new entrepreneurs this has become the first concern, and in some cases even an expectation, that if you think you have a valid idea, you deserve to get funding.
With the emergence of venture capital companies, seed funding companies and accelerators, as well as prominent business angels everywhere, and the ease of reaching everyone via LinkedIn has led to the another belief, that getting funded is easy, and this is just a matter of following a certain process.
This can be true for profitable established businesses, but it is not always true for startups. It’s very common within the startup space, to often get asked for contacts and introductions, instead of advice. The search for capital has often trumped the search for a functioning business model, and it somehow turned funding as a goal instead of a process. It is a goal in the sense that it means that someone believes in you, but it should not be the motivator to start a business.
First, depending on your strategy, the type of funding that is suitable to you, and the type of investors, changes. Early-stage investors tend to point towards unicorns and other disruptive business models and technologies, as, due to the high failure rate of startups and the long-term return on investment, a sufficient return would not be possible otherwise. That’s why many startup businesses are not suitable for high-risk early-stage investors, as they do not allow for a sufficient growth and disruption to be part of that portfolio.
If your company resembles more a normal business, that can one day turn into an SME, you may have to access other smaller sources of funding, as a return for equity investors may not be possible or may not be worth the risk. On the upside, you can reach profitability earlier that the typical startup. Also, it’s becoming difficult even for startup-like business to fundraise at very early stages. Traction and a complete proof of concept is becoming increasingly required by all types of investors. Funding rounds are becoming more generous, but they are also taking places at increasingly later stages. Clients are a must, and therefore doing anything possible to acquire those first few clients, even if the technology is not perfect, becomes your first priority as a new entrepreneur. For hardware companies, this is more complicated: however, proof of concept can be achieved through valuable partnerships and other forms of validation. Your past track record, if you had other companies, also helps.
Long story short, equity fundraising without full validation and a revenue-generating company is not easy or straightforward. You may have to get creative. (This is also true in many way for equity crowdfunding, whereas reward-based crowdfunding is another concept where you are getting advance payments from your customers, rather than giving equity.) Without certainty, outsourcing the fundraising process to others will not bring much. If funding is a must before the operations and development can be started, any funding that you receive will be based on who you are. Only someone that you know well can truly vouch for you. A consultant may help with the day-to-day tasks, but any investment that you receive will be based on how you get along with an investor and how they believe that you are trustworthy. Just think: if you were someone else, an outsider, would you invest in your company if you came across it?
As the traction increases, and your business model and future possibilities becomes more and more certain, as your company becomes able to operate without you (and in a way you make yourself replaceable), capital raising becomes less about you as an entrepreneur, and more about your product and company, and the value of your company also increases. This is the case when it makes sense to hire someone external to accompany you through the process, prepare your documents, and contact investors. As your company becomes more mature, the type of investors that you contact becomes more traditional, for example private equity firms. In some cases, contacts and introductions help, but they are not a must, and more traditional investors are open to talk to consultants or entrepreneurs if the business fits their requirements and if they receive high quality documentation on the investment opportunity.
The investment process and the contracts involved also become more complex depending on the size of the transaction and the type of investor, but in all cases, at that point, getting external advice during the due diligence and knowing what the process involves becomes valuable for both startups and SMEs.