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How to get $1 million to fund your start-up
Shant Oknayan, co-founder of Glambox, discusses the best way to finance your new business
March 24, 2014 2:49 by kippreport
Starting a new business requires money and most simply don’t have it. So, how do you get $1 million to fund your start-up?
Getting money from anyone is hard work, especially if your business is still in the ‘big idea’ stage. However, if I were to sum it up, I would say it’s about perseverance, belief and commitment.
Perseverance, because this is a stage where you will follow one lead after the other, investor after investor and, at times, with no encouraging results in sight, hoping that you will eventually come across someone who would be interested enough to hear more about your business idea and, with a bit of luck, back you up.You will also hear ‘no’ a lot,which you need to get used to; don’t take it personally and keep working harder at it.
Many successful start-ups and entrepreneurs will tell you, while reminiscing about the decisive times of their pasts, that failure was never an option and that the one thing that kept them focused in the direst of times was their conviction in their business concepts or ideas they had. What they mean is that your belief may be the only thing you have going on for yourself at times as the only source of drive.
Finally, there’s commitment. When you start a business, there’s no room for half measures. You need to be fully involved in the business, 24/7 for 365 days a year; the only acceptable path to success is total dedication. All of your resources – time, savings, knowledge and energy –will go into your business.
So, now that you know, more or less, what you should expect in terms of raising money, how do you actually make sure you get the funding you need? How do you know how to sort through available funding options? How do you determine which are the most beneficial and which ones should be pursued?
Here are a few tips, from my own experience, that may help you.
Know which doors to knock on first
Full self-funding is very rarely an option for regular start-ups, especially for first-time entrepreneurs. Even if you have some savings, in the wider scheme of things, that amount is limited and will very quickly cease to cover your basic business costs (unless, of course, you have a trust fund in your name).Family and friends may grant the most immediate access to additional finances. Many entrepreneurs have tapped into their circles of relatives and friends to secure some of the initial funding they have needed. Needless to say, this is not charity or ‘sweet 16’ birthday money. You need to think of it as a business transaction and work out ways in which you will return the investment.
Not all doors will open, but knock on all, all the same
A lot has been said about the financial ecosystem in the UAE and the level of support it provides to SMEs and start-ups. And, while things have been more dynamic of late, the reality is that, as a start-up, obtaining a bank loan is nearly impossible. Banking institutions are simply not equipped to deal with start-ups. A bank loan typically involves financial statements and documents to establish a start-up’s solvency. These two words together– ‘start-up’ and ‘solvency’ – are an oxymoron. A start-up is not a business yet; it’s the potential of a business, and its value and solvency lie it its potential.
Nevertheless, going through the banking mill is a very important experience for the future. The key takeaway is that, as a start-up or a small business financial discipline, keeping accounting books from day one and writing a business plan with sales projection are indispensable to building a healthy company and, one day, it will even qualify you for a bank loan.
You should be so lucky to have these doors open for you
Angel investors and VCs are not only the last resort for the region’s start-ups, but, in many ways,they are the most preferred funding options. To begin with, they are among the very few to understand what start-ups are about and in a position to evaluate the potential for growth of an idea or proof of a concept.
It’s important that you do your homework and seek out parties that could be the most responsive to you and have invested in the past in businesses similar to yours. For example, if you’re a tech start-up, look for VCs that have a portfolio of tech companies, or if you’re an e-commerce business, again,search for someone with relevant credentials. This can be a great advantage, because you’re not only gaining a partner with funding, but also market knowledge and sector expertise (what is known as investors with ‘smart money’).
Typically a VC or an angel investor would be interested in equity in exchange for financing, so be prepared to negotiate. First, there’s the valuation. When someone gets a share in your company, there’s an implicit value for it. The initial valuation in a start-up is like guess work but, as the business matures, the valuation gets closer to an actual market value. In the case of a new start-up, the valuation number is indicative of the contributions made by all of the parties concerned.
Then, there’s the exit strategy. Investors need to know that they can get their capital back. This is a key consideration, so you need to make sure your exit strategy is as convincing as your proof of concept. You’ll find out quickly that managing your investors is one of the most important skills for an entrepreneur.
In many ways, funding your start-up is like driving a gear-stick car. With each gear, you barely get the amount you need to catch the speed required for the next gear and so on. So, how do you get $1m? Be prepared to go through several rounds of funding and multiple gears.