Funding is the lifeblood of every startup business.
Without it, your company will DIE.
Really, it will.
I’m not being dramatic here. Every single successful company out there has experienced multiple rounds of funding.
Usually, it starts with the founder. They’ll put their own money into the company. This could come from their savings, 401k, or their day job.
Then, it progresses outwards into other sources like:
- Friends and Family
- Debt (Credit cards, Loans, etc.)
- Angel Investors
- Crowdfunding
- Venture Capitalists
- IPOs, and other funding sources.
Entrepreneurship is a LONG road with many ups and downs. As the entrepreneur, it’s your job to organize land, labor, and capital in order to create products and services that people can buy.
Ultimately, your job is to raise capital and bring in sales. You gotta keep the fire going. You gotta keep adding more kindling and fan the flames.
With this article, I’m going to show you how to quickly get funding for your startup business so that you can get back to doing what matters – conducting business.
Seeking out new funding wastes a tremendous amount of time that could be spent growing your business. I want to save you from that headache.
First, I’ll go into what’s required to legitimately ask for money. Then, I’ll go into the different sources of capital that you can draw from.
1. Funding is All About Sales (But NOT The Way You Think)
Depending on the stage your company is in, your sales WILL or WILL NOT matter when it comes to the funding round.
However, one thing that will always matter is your ability to sell the company to potential investors.
Sales is just a fancy word for persuasion. Every meeting that you have with investors is a chance to persuade them of the VALUE of owning a part of your company.
All the activity leading up to that meeting is just lead generation. You’re working to get a meeting in person with investors so that you can walk them through a presentation, sell them, and close the deal.
Treat it just as if you were trying to sell products to any other customer. You go out there, generate leads, and then work to move them down the funnel until they convert into sales, or in this case, investment.
Knowing this, ask yourself, what is the most powerful parts of a sale? Every great sale includes:
- An emotionally evocative story that creates trust and builds empathy
- Proof of concept which demonstrates the person will benefit from the transaction
- A vision for how that person’s life will change (or in this case, the growth of the company)
- Handling objections and complications that come up
- A reason to take action NOW.
Knowing this, you’re going to need to work on your story, pitch, proof, credibility, presentation, and the “missing piece of the puzzle” that the investor can fill.
2. Investors and Customers Want “Proven” Solutions
Investors have a PROBLEM. They need to get an ROI on their money for themselves or their fund. The only way they’re going to do that is if they wisely invest in companies that will grow substantially over the next 5 years.
While they might make 30% of their money back by investing in a small idea like a Deli or something, it’s not a big enough of a return for the overall fund.
Depending on the size of their fund, they’ll need to invest one or several million across multiple businesses. So, they’re looking for an investment opportunity that makes sense.
Here’s a secret… there is no investor out there that actually likes taking risks. No matter what B.S. they tell you, they’ll try to mitigate their risks as much as possible.
They want to invest in a company, product, or solution that is proven. They want to know that “it works” that it’s working right now, and that it’s going to to continue to work far into the future.
Anything that you can do to show this to them is golden. It will put you head and shoulders above everyone else out there.
Examples of “proof” could include:
- Sales figures
- Daily/monthly active users
- New signup growth
- ROI on advertisement spend
- Credibility indicators from influencers, etc.
How can you convince investors that this business is not just some idea in your mind, but something that tangibly is getting results (even in small ways)?
3. ROI – Return on Investment
Every time someone “gives” you money, there is an obligation attached to it. There is an expectation of some kind of return.
At some point in time, investors anticipate that they’ll be able to cash out their investment in your company through a liquidation event.
A liquidation event is just an opportunity where someone can sell their stock in your company. This could take the form of the sale of your company or an IPO.
It’s rare, but some investors are also comfortable with getting an ROI through a longterm dividend distribution.
So… if I gave you $1 million dollars, I would expect that in the next 5 years, you’d grow the value of my investment to $10 million or more.
I would want you to spend that $1 million in order to fuel the growth of the company. I wouldn’t want you to “hang on to it” or spend it on non-essentials.
After all, I could just as easily put that $1 million into the stock market and earn 8% annual ROI in the longterm. That is the opportunity cost, as they say in economics.
I’m betting that you’re going to give me a better return than the stock market.
The way to get funding quickly is to demonstrate unequivocally that the investor is going to get a massive ROI in the longterm.
Here are a few warning indicators to investors that the ROI won’t be worth it:
- The market is too small. There aren’t enough people in the market, or the niche is too small and has no opportunity for expansion.
- The product has no defensive moat. It’s easy to copy your business. It’s not very defensible. Profits will be competed away, lowering the value of your company.
- Slow company growth. You can have a solid business that’s generating healthy profits. Doesn’t mean investors want in. The only thing that matters it the growth potential. That’s how little businesses become big businesses.
- No company “multipliers.” Businesses have different multipliers. Typically, technology companies have higher multipliers than service-based businesses. This means that if a good tech company had $1 mil in sales, it could be sold for $5 – $10 million. A service business would command much less of a valuation. Your brand, for example, could be something that increases the valuation of your company.
If you can avoid these common pitfalls, you’ll be more likely to get funding for your company faster.
But, it’s not all about numbers. There is also a human element to running a startup that investors want in on. I’ll get into that next.
4. Your Team’s Skills and Commitment Is Crucial
One of the major elements of every successful startup is a talented, driven, and committed team.
Technology does not improve on its own. It only improves if a group of people work really freakin’ hard to improve the existing products and services.
The earlier the stage of the company, the more important the team is to your funding round.
The growth engine has not yet been built, so investors will carefully be looking at the team and wondering whether or not you can “pull it off.”
You’ll raise funds much faster if you have a credible, proven, and dedicated team that can fulfill the product roadmap.
At the end of the day, a company is just a group of people that are organized towards a common purpose. If you were take all of the talented engineers away from Facebook, it would stop rolling out great new functionality and it would stop growing.
You should feel so certain about the team that you have building this company and believe in it so much that anyone who speaks to you walks away thinking “well, I don’t know if the product will work, but that team is bound to build something amazing.”
There are many companies that must change their product along the way. Investors know this. They’re really betting on the team, especially early-on in the funding process.
5.Use Future Pacing and Other Tactics
There are a lot of psychological tactics that you can use to get someone to do something.
Some of them are B.S. and others work quite well.
A powerful technique for getting someone to emotionally invest in you is to use “future pacing.”
Now… you might be thinking… why is this guy talking about psychology? How does that play into raising money?
Because the better the grasp you have on these decision triggers, the easier and faster you’ll be able to persuade investors to buy into your vision for the company, and thus give you money.
Future pacing in simple. All you do is paint a vision for the future using concrete, descriptive words. “Imagine it will be like when…”
This gets the investor thinking about how the future will look and how your product will fit into that future. It them to more clearly see the same vision that YOU had when you started the company.
It also allows them to bring up objections like, “mobile commerce won’t be as big in the future.” You can then address those objections.
When someone sees the same version of the future that you do and they believe in your team/product, the decision becomes a no-brainer.
If you’d like to discover more psychological tactics, I talk about them here.
6. Sources of Capital
There are several key sources of capital. These differ based on the risk that you take on and the stage of your company.
For example, if you’re trying to raise $10 million, you’re probably not going to want to use Kickstarter or Indiegogo to get those funds.
However, if you’re only trying to raise $50k to fund the initial production run of a physical product, then crowdfunding could be a great option.
Angel Investment: An angel investor is an individual with a million dollar plus net worth (excluding their house). They also earn more than 200k per year. They are basically a high net worth individual. Typically, they invest between $25k – $500k in the earlier stages.
Friends and Family: This is the main source for many entrepreneurs. The great thing about friends and family is that they already know you pretty well, so they know what you’re capable of and are more likely to buy into your vision. Just be sure to treat them like actual investors.
Crowdfunding: I write about this topic a lot. You can use a website like Kickstarter or Indiegogo to get funding for your business. Typically, these function as “pre-order” campaigns. The backers will support the project in exchange for a copy of the product when it’s created.
Credit Cards: I don’t recommend using credit cards, though many startup founders have used them to help buy inventor or in the event of a cash crunch. You can also use services like Upwork to get a low-interest loan or refinance your credit card debt.
Loans and Debt: Unless you have capital-intensive business with equipment, you’re probably going to be taking an home equity loan in order to finance your business. You could also put up some other form of collateral. Of course, this is risky.
Venture Capitalists: Venture capitalists will usually come on board in the $1 million plus funding rounds when your startup has product-market fit and it’s ready to grow out the organization.
Programs, Prizes, Competitions: Lastly, you can always get funding through grants, government programs, and business competitions. This is a nice add-on in the early stages, but it’s not a dependable way to finance your company obviously.
For more information on how to get funding for your startup company, you can watch this YouTube video.
