How to Make Your Startup Finance Ready
If you are building a company, then, raising funds is something that constantly crosses your mind. Raising funds is one of the crucial ways that are going to fuel the growth of your business. But, it does not start with preparing a pitch deck. It starts from the very first day you had a business idea. It takes time and proper planning to build a company to a stage where it can get funds.
So, while you are just starting out, the process of fundraising might seem very straightforward. Get a cool business idea, Achieve X-figure sales, and Boom! the VCs are convinced. But, this is not how it works. VCs analyze any business from a strategic point of view and this is where things get complex.
Therefore, it is necessary to prepare for funding from day one of your Startup journey. In this article, we are going to discuss some key areas that you need to focus on to make your startup finance ready.
Let’s get started.
Initially, when you get a business idea, it is hard to make a detailed business plan covering all areas. But, once you start your business operations and get on the ground, it is then, that you discover the challenges and problems that you face in executing your idea. Once you get a hang of it, you can organize your business processes and formulate a detailed plan. A business plan should include the following:
- Market Analysis
- Who are your competitors?
- Your target segment
- Your organization’s structure
- Your profitability plan
- How are you managing your finances?
These are just an outline. You are required to cover all these points in a detailed manner. This would not only bring clarity into the minds of the investors but would also highlight your purpose for raising funds.
Building the right team
If you are an early-stage startup, then, building the right core team can take you halfway towards raising funds. But, Rome was not built in a day. So, does the team of any company. Firstly, if you have a business idea, you should look for a strong founding team that resonates with your business idea. Then, as the organization progresses, build a dependable team according to your organization’s structure. Venture Capitalists are always curious about your team and whether their idea of the company’s product is the same as yours. You may choose to outsource some of your tech and customer support to save costs. In this scenario, there should be a Chief Technical Officer or Relationship Manager in-house to manage the outsourced work. Gradually, you can start building a dedicated in-house team to maintain your secret sauce. The approach you choose depends on the nature and vision of the company. But, do not outsource your core competencies and build in-house resources for it. All investors want that you have the right people to execute your idea.
You can also involve someone from the industry to guide your company from the very beginning. This gives confidence to investors to finance your startup.
Cash Flow Management
Most startups fail because they are not able to manage their cash burn. Cash Flow Management is very crucial to ensure the long-term survival of the company. Investors often look to evaluate how well the startup has managed cash in the past. Therefore, to make your startup finance ready, it is important to have a proper spending plan in place. Your cash spending will tell investors how well you know your target customers.
So, from the very beginning, establish a budget and monitor your cash cycle. Initially, when the startup is operating without funding, you can rely on the following methods to ensure a smooth flow of cash for funding day-to-day operations:
- You can negotiate for a longer credit period from your creditors. In this way, you would require less working capital to function.
- You can discount invoices of your debtors from the bank to release cash into the system.
- Do not go for a fancy office in the beginning. Establish remote working. This would help to cut down many fixed expenses such as Rent, electricity, Office maintenance expense, etc.
But, Cash Flow Management is not just about spending money, it is also about how strong your revenue model is. While building a product, keep your operating cycle low and cash conversion cycle high.
Focus on Customer Acquisition
No matter how revolutionary the idea is, it should be validated by the market. The Customers in the market should show interest in your product. Investors are often intrigued by the daily traffic numbers, active users, repeat orders, customer conversion rate, etc. If your product is gaining traction, this shows that you are focusing on customer acquisition. Venture capitalists want to see whether people are considering your product or whether it actually solves a problem or not.
But, you should not overspend on acquiring customers. Investors check the viability of a business by analyzing Customer Acquisition Cost (CAC). So, from the very first day of your startup, focus on reducing CAC gradually. For example, to bring traffic Paytm used to give direct cashback to its customers. The traffic decreased as soon as it stopped giving cash back.
So, no matter how lavishing you spend on marketing, at the end of the day, customers should find a greater value in your product. This would help to sustain existing customers and acquire new customers in the future.
To avoid financial blunders, you need to have a startup budget in place. This Budget will include a detailed breakdown of the capital you have and how you are planning to use it. You can make this budget through market research, by looking at your peers and your best judgment. This Budget will help you to be on track and prevent a cash crunch.
For making a startup budget, first, classify all your expenses into fixed and variable costs. Fixed costs are those that would be incurred every month irrespective of whether you conduct your business operations or not. For example, rent, electricity expenses, insurance costs, Internet expenses, Website hosting fees, etc. Variable Expenses are those that would incur only if you run your business operations such as the cost of purchasing raw materials, sales and marketing expenses, Transportation costs, etc. After making a budget for expenses, estimate revenue for the corresponding period. You can estimate this revenue by analyzing the size of the market that you are targeting and your target market share in it.
You can also make a working capital budget where you can figure out how you are going to manage funds for day-to-day operations. After making all these budgets, review and adjust all these figures to find out the room for cost-cutting, increasing the scope of revenue, raising capital, etc.
Breakdown Financial Goals
As an entrepreneur, you would have thought about how far you want to take your company in terms of market capitalization, revenue, profit, etc. Though investors would be impressed by your multi-million goal they would be more convinced if you show them how you are going to achieve this goal.
So, from the very start, break down the financial goals into small milestones. You could break these financial goals into short-term and long-term goals. In short-term goals, you could set targets for monthly or weekly revenue, profit, number of product users, etc. Track these goals constantly. If you miss on these goals, introspect about whether the goal needs to be redefined or there is a need for improvement. In long-term goals, set your 2 to 5 year plans about the valuation you want to achieve, the market share you want to acquire, increase your product reach, establish a brand image, etc.
This would not only provide you an insight into where you are heading in your entrepreneurial journey but also help you to build a solid case in front of VCs. You can show this data in your pitch deck that how you have achieved milestones in the past. This would help you gain their confidence.
Venture Capitalists are going to analyze the valuation of the company. This will be done from the Balance Sheet, Profit & Loss Account, Cash Flow Statements, Budgets, Tax Returns, etc. So, as an entrepreneur, maintain all such financial records properly. This would also help you track metrics whether you are in line with your financial goals. These financial records can also be used to make policies such as customer credit period, return and exchange policy, and decisions such as product development, marketing strategy, etc.
You should review these financial records regularly and compare them with budgeted and actual figures. These Records would also help you make decisions about how much equity you want to raise and for what period. While analyzing the valuation of the company, the Venture Capitalists often look at the next 5-year financial projections to get an idea of the profitability of the company. Your past financial records form a base for these projections. These financial records would help you to convince investors that you are focusing on the right metrics and moving in the right direction. So, if you keep your financial records straight from the very first day, it will help you secure funding more easily.
Networking and Digital Presence
In this digital age, Networking is important to growing business. It is through networking that you can land an industry expert to guide you from the very initial stage of your startup. Nowadays, customers not just look at the business but also associate it with the brand of its founders. You can conduct virtual summits, Web seminars and have a presence on social media to establish a strong brand image. While considering a startup for funding, investors analyze how your brand is perceived by people through your company’s digital presence. This would be an effective strategy to create brand awareness as well as to bring more organic growth in the future. This would also help you to connect with other entrepreneurs and investors.
So, these were some of the points that you have to start building on from the very first day of your startup journey to make your startup finance ready.