If you have a great idea for a business but nowhere near enough money to make it reality, you’ll need to raise money from outside sources.
Don’t feel too bad. Most entrepreneurs aren’t able to self-finance for very long. They turn first to “seed” or “angel” investors, then to venture capital firms like Target Global, then to private equity firms or other “later-stage” private investment shops, and finally to public debt or equities markets through an initial public offering.
The full lifecycle can take many years and countless person-hours, if you even make it that far. But let’s not get ahead of ourselves. If you want to have a shot at success in the long run, you must do these five things before raising your very first round.
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1. Put Together a Comprehensive Business Plan
Does your company have a business plan?
Do you even know what a business plan is?
If you can’t answer “yes” to both of these questions, stop what you’re doing and read the Small Business Administration’s guide to making a business plan. It will take you only a few minutes and will save a lot of time and grief in the future. You’ll need a business plan if you want to be taken seriously by funders.
2. Hone Your Value Proposition (And Learn to Tell Your Story)
After your business plan is in the books, turn your attention to your growing company’s value proposition. You have already given some thought to the value you plan to add for future customers, but this is your chance to craft a really compelling argument for your specific solution. When it comes to attracting interest from investors, a value proposition is nearly as important as a formal business plan.
3. Exhaust Your Personal and “Friends and Family” Capital
No matter how friendly the terms, outside funding always comes with strings attached. For this and other reasons, it’s important to exhaust “internal” sources of funding before going hat in hand to people you don’t know.
The first funding you should tap is your own, and that of your fellow founders. When that’s exhausted, move on to friends and family members who are willing to lend you capital for little more than a promise of eventual repayment (and maybe not even that). Other possible funding sources include public and private grants, awards, and competitive prizes. Only then is it time for a proper fundraise.
4. Hire or Commit Key Roleplayers
Your new company won’t get very far without talented people in the right seats. Before you begin raising funds from outside sources, make sure you’ve hired or committed these people to future roles. Without them, you may find it more difficult to convince funders that you’re serious about building a successful business.
5. Develop a Prototype or Conceptual Product
Many venture capitalists are visual learners. Having a prototype or conceptual product also shows that you’ve thought deeply about many of the problems you’ll need to solve to bring a viable product to market. A prototype can also help you build buzz around your business long before you’re ready to sell for real.
Your First Fundraising Round Probably Won’t Be Your Last
It’s been said before, but it bears repeating. Most successful companies must raise multiple rounds of capital from public and private sources. It’s one of those necessities of life — or business — that few enjoy but almost everyone must participate in.
With that said, your first fundraising round is probably your most important. If it’s successful, and you’re able to come out of it with some momentum as an organization, you’ll find subsequent fundraising efforts become easier. So, be careful not to look too far ahead right now. You’ve got work to do.
