So, the idea has evolved and is now a company doing decent business. You got yourself a couple of people whom you could call co-workers and some more whom you could call clients/customers. And now, it’s time to go further and it could be determined by the financial aid you manage to get for your company.
To all the startups and founders who are at the “funding” juncture of the entrepreneurial journey, here are some pointers that could come in handy.
1. A scalable business model
First things first, your business model/idea must have potential scalability. Sure, it could be a brilliantly unique idea but it wouldn’t matter if that doesn’t convert to money. What is scalability, you might ask? It is to have a scope for high profits and low investments (on things like infrastructure and marketing). So, your business should have scope to expand while making a decent amount of money on the way.
2. Get your numbers right
When you approach the investors or even planning on raising funds, you need to have a clear idea as to how much money would you need to run the business. While you are there, be precise. Contrary to the popular phrase, “the more, the merrier” isn’t something that works for businesses.
3. Viable Financial Model
You need to do some serious homework here. Consider all the factors that require some funds to be spared for them. From training, production, hiring to technology include everything in your calculations and make a financial model that ensures positive cash flow.
The following are the various options for any business to raise funds:
1. Family and friends
While convincing your friends/friends to invest in the business might not be a comfortable approach and it does carry a few risks but you can eliminate the risks by keeping things professional. Handle the whole process with the utmost professionalism by taking care of all the documentation as you would do with any other investor.
Crowdfunding is an interesting way to raise funds for your business. This approach would not only fetch you potential investors but also gives your startup some exposure. However, crowdfunding requires a whole lot of planning and time. If you are somebody who has a good network, then it could be an added advantage.
3. Angel Investors
The Angel investors invest a large amount of money (not more than $1 million) in exchange for equity in the startup. However, this option has its own cons like losing a part of ownership over the company, the investors having a say on the company strategies and more.
Partnerships are one of the best strategies when it comes to funds. Partners not only reap the profits but also bear the liabilities along with you. Yes, there might be disagreements but as long as you choose the right partner you are good to go.
There are a couple more options like venture capital and bank loans that you can consider while looking for funding options.
After everything is set with pre-funding, here are a few things to take care of while going through the funding process.
1. Due Diligence
Investors will perform due diligence of the company that they are funding. So, to go through this process seamlessly, there are certain points the company should take care of, especially for the startups:
Make sure you have a team that resonates with the same passion and commitment as the founder.
Do thorough market research and be ready with the features which make your company stand out from the competitors.
All the IP rights must be taken care of.
Budget projects must be controlled meticulously.
Create a name for yourself, online.
2. MOA (Memorandum of Association) and AoA (Articles of Association)
In simple words, MoA defines ‘what’, ‘where’, ‘why’ and ‘who’ of the company and AoA defines ‘how’ of the company.
The following will make for the pointers wrt MoA and AoA:
Check whether the company is authorized to raise the capital or not.
The authorized capital must always fall under the set funding limit.
The company must have authorization in place to raise funds from different sources/classes.
3. Secretarial Compliance
Secretarial Compliance examines and checks compliance of various laws including the Companies Act, 2013 and other corporate and economic laws applicable to the company. Therefore its an independent and objective assurance intended to add value and improve an organization’s operations. It is not mandatory to be followed by all private entities but companies tend to adopt secretarial compliance for avoiding the risks associated with non-compliance.
While securing the funds is a milestone to be hit, the journey doesn’t end here. You must be aware of pointers that will help you put your money to good use.
1. Do not drift away from the plan
Congratulations on the funding! But, do not get carried away by this success. Stick to the plan and make sure you are doing the exact same things that you promised your investors that you would do. Do not go on spending spree!
2. Be wise with the expenditure
It is advised to be extremely conscious about where the money is going. Especially, when it comes to technology make sure you choose affordable yet feature-rich products. Keep the future in mind while spending the funds.
3. Keep the investors posted
Loop your investors and keep them posted about the company’s development. It is always a good practice to tell investors about where their money is being spent.
Entrepreneurship is not a rosy path to lead. It has challenges lurking in every corner and funding is especially a tough process to go through but it always better to be prepared than sorry.
Written by: Dheeraja Manvi
Inputs by: Sai Tharun Perakam, Practicing Chartered accountant