When To Consider Attracting External Financing

Often, businesses require investments at the initial stages of project development – when they attempt to develop a prototype or launch the first sales. Then the businessman faces raising capital from private investors and investment funds. Due to increased uncertainty and risks, banks refuse to lend to such startups or do it on personal property security.

My experience in corporate finance is over 15 years. I help startups, and growing businesses raise investments and get their finances in order.

This article will tell you where to look for investors and how not to miscalculate financing terms.

Ways you can increase capital for your business idea

Investment in external funding keeps a business going until it gets back on its feet and starts generating sustainable profits. Or until the investor runs out of patience – after all, many projects never realize their potential.

It is one of the critical types of investments – it is also called venture capital. It is true when it comes to innovative startups. According to statistics, 75% of such projects do not survive, and the investor completely loses the invested funds in 30-40% of cases.

External financing is often necessary for business development. According to surveys, 49% of startup entrepreneurs consider investments an essential resource for the company’s growth.

Seed and startup stage – when the product is just being developed and brought to the market. This period is also known as the valley of death because, according to statistics, 8-9 projects out of 10 fails here. They never reach the break-even point, and investors partially or entirely lose their investment.

The expansion stage occurs when the company gropes for a successful business model and effective promotion strategy, sales growth, and cash flow becomes positive.

Growth and mature growth occur when a company steadily strengthens its position in the market and becomes consistently profitable.

Each stage implies a different level of risk: the younger the project, the higher the uncertainty and chance of failure. Accordingly, the amount of capital raised and the purpose of its attraction also differ.

If, in the early stages, the main task is to bring the product to the market to test demand, then in the later stages, it is to increase market share and increase profits.

Typical mistakes of novice entrepreneurs

Entrepreneurs must remember that investing is free capital to make a profit for any investor.

About half the time in my practice, I encounter startups that are not serious about money: often, they treat a potential investor like an ATM from which you can make money with the promise of dim prospects. The entrepreneur does not have a transparent business model but expects that the attracted investments will somehow start sales.

Or another option: the owner of a dying company is looking for investments. We often talk about a small enterprise that fed the owner for some time, but something went wrong – the market changed, or a key customer left.

Often the matter is complicated by an enormous debt to banks and suppliers. There is usually nothing to support here:

• The equipment is outdated.
  
  
• The customer base is small.
• There are illiquid goods in the warehouse.
• The owner does not even have a well-thought-out anti-crisis plan, but at the same time, he hopes that the investor’s money will help save the situation.

I recommend that all entrepreneurs put themselves in the place of an investor and think like him. Professional investors are primarily interested in the following:

Projects with launched sales, demand confirmation, and a clear promotion strategy

Companies with attractive assets: patents, equipment, or customer base that can generate synergies with other investments

In other cases, I usually advise looking for an investor in your immediate environment – among friends, acquaintances, or relatives.

Investment types

So, you are an entrepreneur and are planning to attract investments. When trying to be effective in fundraising, it is essential to remember that each investor specializes in specific industries and stages of their development. Therefore, it is necessary to focus on those investors whose sphere of interest your project falls.

The advantages of debt financing are that you do not need to share profits and control over the company. However, suppose a business is starting up. In that case, a novice entrepreneur is unlikely to receive a loan from a private investor – except perhaps on the security of expensive property, a car, or an apartment. Therefore, sharing a share in a business with an investor is a good option. It is ideal if, in addition to money, the investor also brings his experience and connections to the project.