Raising capital is a crucial process in building a successful company. In the digital age, there are an array of paths that can be taken when it comes to raising capital. However, prior to even considering an investment strategy a company must demonstrate that it knows what it's doing. It is imperative to know your industry inside out and be sure that the product you are introducing to the market is unique and original. With this in mind, a working model, viable product and plan for growth based on your progress thus far are the bricks that lay the groundwork for raising capital.
Without a solid foundation, raising capital is near impossible. The following outlines what even the most experienced startups need to know before they even consider entering the funding marketplace:
What is the most realistic option for initially raising capital for my company?
The first stage of raising capital is called seed funding. There are three roads every startup can consider during the seed stage when raising their initial capital:
1. Raising capital from friends and family
2. Raising capital from angel investors
3. Raising capital through crowdfunding
All three of these options provide an excellent foothold for a startup that is taking its first steps. In order to get any sort of funding, the idea that is being grown has to be presented with a strong business model along with a sound timeline and projections.
How does a startup determine what is its best investment option?
Once the initial capital has been raised, a startup needs to consider the next step. This requires an analysis of which route will be more profitable for the business. Despite there being a handful of startups that aren't profitable but have colossal valuations, it is still very important to know what your success formula looks like.
A valuation of how much capital the startup will need to raise in order to reach its projected goals is a decent indicator of which investment path will be most logical. At this juncture a startup can either look to venture capital [VC] firms or other alternatives such as family offices and crowdfunding. When considering the options, it is important to keep in mind that there are different VC funds and crowdfunding platforms that concentrate on different industries. This is precisely why a startup has to do its homework before raising capital.
What are VC's? What are the investment trends being observed among VC's today?
VCs are capital powerhouses that invest in businesses in exchange for equity. The way VCs are structured, they have fallen into following certain trends that can be very helpful for a growing business to understand. Firstly, most VCs are managers of varying forms of capital. Some of it is their own and some of it is being managed and invested for a second party. Secondly, VCs tend to invest less, while attempting to gain a higher stake in a business. Nowadays the investment trends of VCs depict an image of investing in many ideas, hoping that one or two will pan out. This is all done in hopes that the successful investments will cover all of the unsuccessful ones and reap a profit.
What viable investment alternatives are gravitating to the surface of the investment landscape?
Family offices are firms that manage wealthy family funds. Usually a few percent of the firms investment pool is dedicating to high-risk investments, which tech startups could qualify under. By taking this route you need to be able to show that you require a large capital injection to get to your projected goal and most of the family offices will be interested in a long term partnership, rather than a one-time deal, like a VC would propose. Based on your company's business plan it is important to analyze your projections to determine if it will be an appropriate fit for a family office investment and vice versa.
Crowdfunding is a more independent approach with a wider investor scope. With the right idea, many people can be convinced to invest in a product, which could result in very powerful capital injections. Crowdfunding is a field of limitless opportunity; there is no ceiling on how much money you can raise. There are many crowdfunding platforms available such Kickstarter or Indiegogo that will guide you through the process.
Another potent investment option is financial institutions such as banks. Recently there has been a growing interest among the banking community towards investing in startups. Depending on the industry you are in will help determine a bank's interest. There are many questions that are to be considered when determining if this is a good option for your company.
Overall, these are all viable investment options that should be considered by rising startups. Once a startup can visualize it's future trajectory, selecting an investment strategy will become much clearer. Different investment routes can lead to different results and with a strong product development plan and a logical growth trajectory, the options for successful financial growth are abundant.