When starting a business, a common problem is a lack of cash. In fact, many of our clients believe simply having enough funding would solve their problems. While it can be partially true, this kind of thinking can be disastrous for a startup. Here’s why.
What lenders and investors look for
When assessing lending or investment opportunities, different groups have different decision criteria. They all, however, require a strong chance at recovering their investment. For this, each opportunity must satisfy for the lender or investor:
- There is a compelling market opportunity.
- The entrepreneur has a plan in place to exploit the opportunity.
- The plan is realistic and thoroughly vetted.
- The management team is the right one for the business. It has the skills, drive and experience to make the business successful.
Even if the rest of the application is great, any one of those requirements can kill funding. Notice that nowhere in these requirements is a mention of the entrepreneur’s need to buy groceries or pay rent. If you appeal to anybody except family, friends or fools based on economic need, you will come up empty. If that’s not bad enough, it gets worse.
If funding applications were a matter of filling out some forms and getting an answer in the mail, it wouldn’t be too bad to apply for funding before you are ready. The reality is funding applications are completed by people and these people make judgments and talk to each other. Think of applying for funding as offering to bake a cake with the lender’s flour, eggs, sugar and flavouring. Nobody is going to want to pay for a bunch of ingredients mixed together that doesn’t resemble a cake. Plus, all it takes is one bad application for your reputation as a bad investment (chef) to be made.
If this was the cake you paid for, you'd fire your chef. But by prematurly applying for funding, you are trying to pass off eggs and flour as cake.
Another bad outcome of premature fundraising is it is extremely difficult to hide your desperation. If you do get funding, the terms will be bad enough that you will regret agreeing to them.
Applying for funding too early can be like dealing with this guy.
So what should you do? The friends, family and fools route can give you a bit of breathing room while you develop your business. Find alternative financing through odd jobs, savings and equity. In addition, do more with less. Think of how to develop the business without funding. The more progress you can make before you seek funding, the more valuable your business will be.
Finally, before you apply for funding, pitch your proposal to trusted friends or associates. This includes sharing your business plan with them. This outside perspective can alert you to blind spots that every entrepreneur is susceptible to. You need somebody that will give you straight answers, not just praise. This should allow you to put your best foot forward in your search for funding.