An investor that you approach for funding will always ask one of the most important questions, which is, “Why do you need this money?” This is a very important part of the fundraising process. To ensure that it is successful, you must clearly state the reasons for raising the funds, the objectives that you intend to accomplish, and how the investment is going to support the growth of your startup. In this article, we will discuss the major points as to why funds may need to be raised, what a solid business plan entails, and how to set and or achieve objectives and donor appeal goals.

Key Note #1: Reasons for Fundraising

It is important to remember that before attempting to raise capital, you should already be sure of what the funds will be allocated to. Here are common reasons for why many entrepreneurs seek funds: At the initial phase of a startup, many entrepreneurs have only a single product of idea and money is required to aide in. Let’s assume that you have a brilliant idea for a shoe that facilitates speedy efficient running and enables runners to go faster and further. In order to realize this idea, you will need funds to aid in the development of the prototype. This is simply the first step in the process of creating a fully formed product.

Always remember that not every investor invests during the prototyping phases, so for early funding, you may have to turn to friends, family, or even do it yourself. Bigger investors such as SoftBank are more likely to invest in businesses that are already working at a larger scale.

Product Development: Make sure that you reserve sufficient resources to get a factory set up after you have scaled the production. There is usually a considerable amount of money required to set up a factory, buy equipment, rent space and hire workers. This is an extremely important step in product development.

Team Expansion: There is always a need for a marketing team, sales team, production team, finance team, operational team, and many other departments as soon as you have a product ready to market. Allocating funds for human resources is always the earliest step taken in this procedure.

Technology Development: Nowadays all businesses require systems that help build and maintain their webpages or websites, customer relations management systems, enterprise resource planning tools, and many other systems for their day-to-day operations. Developing these systems comes at a high cost, therefore investment may be necessary.

Legal and Consulting Services: As the business scales, the need for legal and consulting assistance increases to fulfill compliance requirements such as those pertaining to Startup India norms, business structure, or legal development. This mostly involves accounting, taxation, or other professional services.

Production costs- Buying raw materials and tools incur an initial investment and must be paid for, along with equipment and spare parts, to keep production going and fulfill orders.

Patents and certification– Funds will be required if your product has an educational ISO or industry specific FSSAI certificate (usually for food-related businesses), and will also be needed for patents and legal papers, which incur extra investment.

Working capital– Capital is essential to pay for regular business operations, such as staffing expenses, electricity, and renting an office space. Although investors may be willing to meet these operational costs, they also ensure that funds raised are put to efficient use.

Promotion– Investors must know your planned expenditure and anticipated ROI, as a well-thought-out marketing strategy utilized a social media oriented plan along with traditional ads and event sponsorships.

SG & A [ Selling, General and Adminstrative ] costs- Funding will be essential to complete overhead costs such as renting an office and administrative spending so investors can rest easy knowing their capital is in a safe place.

Note #2: Parts of a Business Plan

After figuring out the reason you need funding, developing a convincing business strategy becomes crucial. This is how your business plan should look like:

Business Description and Structure: What is the purpose of your business? What products or services do you provide? Further, describe your company’s organizational structure.

Production Cycle: Describe how you intend to manage production. What techniques do you use for Adequate Inventory Management? How do you manage growth in the different areas of your business? Success lies in having a solid operational plan.

Revenue Streams: A business, similarly to a person should not depend on a single source of revenue. If you manufacture shoes, increase your business revenue by selling them to other shoe brands or even by licensing your designs. Including all unique possible revenue streams clearly shows the business growth potential.

Revenue and Operating Models: Describe how you intend to control operating expenses, average cost per unit, and selling price. Moreover, explain the functionality of the revenue model in detail and how you will accomplish your goals in a cost-effective manner.

Priced Product and Market Cost Differences: Always strive to keep a competitive pricing strategy because the offer in the market will dictate how you price your product. If your product is priced at Rs. 200, but a competing product costs Rs.100, it’s clear that investors would raise concerns regarding your pricing logic. In order for market demand to increase, ensure that your product has great value and is competitively priced.

Value of Customer to the Business (LTV): In order to gain investor confidence, you need to show the lifetime value of your customers. This is the amount of money that a customer will bring to the business, over their lifetime. Early adopters of Uber like other services, had high lifetime values which justified the company’s marketing expenditure.

TAM (Total Available Market Value): Conduct a proper research of the market so you can accurately calculate your Total Addressable Market or (TAM). Knowing the value of the market you intend to capture will guide you in crafting the marketing plans, revenue estimates, and growth benchmarks.

Future Forecasts: Investors expect clear details about future profits and losses. Prepare statements and estimates of profit, loss, balance sheet, and cash flow for at least three years into the future. They help to understand the expected return on investment and company profitability for the investors.

Conclusion

Fundraising for a new startup goes beyond the simple concepts of asking for money. It requires a clear presentation of the business, its potential for growth, profits and longevity. By having well defined goals, appropriate motives for fundraising, and a well structured comprehensive business plan, you will be able to secure the needed funds much better than before. When dealing with investors, establish clear goals, understand your finances, and figure out how to achieve a profit. This way, you will not only receive the needed funds, but your business will will take a leap forward into the future.