Money Makes the World Go-Around

In this blog post we will briefly discuss the second most commonly cited cause of startup failure — funding or cash problems. Starting a business takes money. Once upon a time, people wishing to start a business would save money, perhaps borrow some from family, and if the business had hard assets (and they were lucky), they would borrow funds from a bank.

Now, the common wisdom is that there are many funding sources with lots of money, who are all eager to lend support to start up entrepreneurs with a great idea. This is sort of true, but there is a big catch. All professional investors (“Venture Capitalists”) and semi-professional investors (“Angel Investors”) know that most start ups fail. They naturally wish to invest in those they think are least likely to fail, and most likely to make it big — the so-called Unicorns.

Your challenge, when seeking funding, is to look like you have what it takes to succeed. This involves jumping through a number of hoops that investors will put you through as part of the vetting process. Here are some strategies you can employ to help your business shine for investors:

Strategy 1: Dress for Success

It’s important to design your start up idea so that it looks likely to succeed. Perhaps the easiest way to illustrate this is to describe some factors that have the opposite effect.

A business that, from the beginning, looks like it will take serious time and money before it starts generating revenue is an obvious negative to investors. In start ups, everything takes longer than expected, and investors are leery of investing in black holes. This is especially true if you need large amounts of outside investment before you can make progress in getting the business off the ground. The farther along you can get in the development of your idea, and the more obstacles to its success that you can overcome, the better your chances will appear to be when you do approach investors.

If, for example, you are developing an app or other software, completing an alpha or even a beta version before approaching investors will give you a big leg up. Of course, if you happen to have a track record of highly successful startups, this is less likely to be a problem. In that case, however, you probably have your own money, and less need for investors early on.

Strategy 2: Don’t Skimp on the Business Plan

Chances are any investors (other than “Friends and Family”) are going to insist on seeing a fairly comprehensive business plan. This involves a write-up of your idea, a listing of all the steps that you will need to turn your idea into a successful business, an estimate of the likely timing and cost of each step, and revenue projections.

Thinking through and writing a good business plan not only helps you organize and prioritize your start up efforts, it also signals to an investor that you know how the game is played. There are many typical conventions and forms that seasoned investors are used to seeing in a business plan. Creating a business plan that doesn’t seem professional to investors can greatly harm your chances of attracting investment. If you are not experienced in writing business plans, it may be a good idea to hire a consultant to help you (we’ll talk more about the need for a good business plan in a future post).

Strategy 3: Get Your Team Together

Another issue to keep any eye on for potential investors is your background, or the background of your team. Many start ups are begun by young entrepreneurs, who may have a good idea but are likely short on the experience of running a business. This is worrisome to investors, since they know how many good ideas have failed due to bad business execution.

So, if you have areas where you don’t have experience (sales and marketing, administration, HR, etc.), consider bringing in partners or consultants with the appropriate background. This helps you be sure that your start up will be (and will look to be) prepared to meet all types of typical business questions.

A variety of other issues involved in raising money will be discussed in future blog posts. You also might like to check out “Raising Capital? Avoid Pitfalls of a Private Placement”, a recent blog post from two of our colleagues on legal problems incurred by start ups.

Thank you for reading this third entry in the “So You Want to Start a Start Up…” blog. Continue the conversation by leaving a comment or, if you have specific questions, you can call our office at (866) 954-7687 or send an email to info@warren.law.

In the next entry, we’ll tackle the next most common reason why start up companies fail, personnel or staffing problems, and outline some techniques and strategies to mitigate this particular issue.