Ed - Fuel for the Tank
How Much Start Up Business Financing Do You Need?
Getting working capital together for a new business is one of the first steps to launching. Here's how to decide how much start up business financing you need.
With nearly 75% of all startups unable to return the venture capital that they're started with, financing a new business takes some finesse. Venture capitalists and early investors know the risks and are wary about diving into new territory, even with a great concept. Before you start contacting investors and financial institutions about startup business financing, you need to have your pitch polished.
When you're starting your business, you need to solidify your three pitches: the elevator pitch, the short pitch, and the long-form pitch. Each one has a different purpose and ranges respectively from 1 minute to 5 minutes, to twenty minutes. Knowing how and when to deploy each pitch can help secure funding from even the toughest sources.
To figure out how much startup business financing you need, you need to make a sober assessment of your business model. Follow these 6 steps to come up with a good number.
1. Know Your Milestones
Getting to know the most critical milestones for your company can let you know where you need to be at what time.
Lay out your top three goals for the first year. Lay out your top three goals for the first five years. You can start identifying your costs once you assess your projected growth.
Get to know what the most important milestones your company needs to achieve and how much of the local market you need to control. You should have a milestone of releasing your beta product, signing a contract to get it distributed, and which avenues or distribution channels you want to be on.
Make your milestones discrete and individual accomplishments or achievements. Don't bundle them together or make them overly dependent on one another. If you fail to achieve one and they're all interconnected, you could hit a roadblock that stops your company short as the bills start to pile up.
2. Know What It Takes
There will be a number of costs related to reaching your milestones. You need to break down every element to bring a detailed budget to your early investors. If you want people to invest or financial institutions to give out loans, you need to have an itemized budget for how much it costs to make your MVP.
Your minimum viable product will be the basic building block of your business. It's the most essential service you provide. These costs are essential, but you also have to know all of your additional elements.
3. Costs Beyond The Product
You need to have a handle on how much all of the staffing and operating costs breakdown for your company.
One of the most essential but most expensive of all of your investment is in human resources. You need people in order to build your company. You need ideas, talent, management skills, and people who know how to do the technical work you can't on your own.
Once you make a list of your most essential staff, come up with a reasonable salary for each role. You can use Glassdoor for their salary calculator. Calculate something in the mid-range, as you don't want a team built only of fresh college graduates.
You'll also have a separate set of operational costs. Those will include office supplies, technology or computers, and any kind of delivery you need. Office rent and equipment could be a major investment, but having workers with no place to work and no equipment is useless for a startup.
Startup business financing should also include any kinds of additional professional services. You'll need an accountant or an attorney in most industries, even if you can't afford to pay to keep them on staff. Get to know what's standard in your industry and put aside money for that.
And don't forget marketing. You need to let people know that you have products that can fulfill their needs. Good marketing costs time and money, so budget 35% of what your projected earnings are on it.
Include a strong customer referral strategy and you'll be able to lower your marketing costs relative to your returns over time.
4. Consider Different Funding Sources
To achieve solid startup business financing, you need to get funding from a variety of sources. The idea of one big check sounds nice! However, if you get all of your funding from one source then you could have trouble paying it back. You don't want to ruin an important relationship, so you need to raise funds from different sources.
You'll have a high "burn rate" when you start, with the amount of money you'll spend operating and setting up the business outstripping revenue. The worst mistake you can make is to underestimate how much money you need. You don't need to keep your business from getting off the ground by running out of money halfway through the setup.
Start by talking to friends and family. If you've met successful people who inspire you, reach out to them as angel investors. Next move on to pitching to venture capitalists who can give you money in exchange for the percentage of the company's worth.
5. Now Establish The Funding Goal
There will be pros and cons for every kind of funding source. Raise what you need, not too much more. If you end up overspending and owing in the end, you might even lose your business.
Losing money for your investors has been a building block for many major companies, but since you're not Elon Musk, you could build a bad reputation.
Capital efficiency is the key. Give yourself a little cushion beyond your expenses but use your money according to budget and you'll be able to survive beyond those first critical 2 years in your startup's life.
Startup Business Financing Has No One Model
Every startup gets their initial financing in a different way. If you're looking to take over a market before your competitors do, you'll have to move fast. If this isn't a worry, you can be more patient and grow your business more organically.
If you want to know how to easily market your service once you're funded, check out our guide to doing it in 7 easy steps.
Aaron Vick is the Chief Strategy Officer of Cicayda, a legal software company making sense of the discovery process by fully understand the data using real-time actionable analysis, immediate complex search results, and complex managed review workflows.