It has been observed that many business owners start thinking about funding their business and approach to investors and finally whosoever investor is ready, if any, business owners go ahead with him. Later on, the promoter-owner has to face many unnecessary problems because of it. It, sometimes, becomes self-devastating because of leakage of the business idea.
The right way of getting fund starts with proper planning. Plans give insight to the owner and confidence of investors in business idea and management.
Let us discuss the steps which should be followed:
1.Get a feasibility report of your business idea
We develop a business idea. We want it to give it a hardcore shape of business. We want to survive. We want to grow. We want to acquire market share and so we want to acquire another business. The feasibility report is the document which helps in the above all. The feasibility report, overall, says that whether the business shall be feasible at various dimensions.
- Executive summary- An outlook of feasibility study
- Skillset of management needed to carry the business
- Product feasibility- It should include USP of the product also.
- Price feasibility- What should be the feasible price of the product along with the associated services
- Market sustainability- overall sustainability of the product in the market
- Legal and environmental feasibility- Rules and regulations of central, state or local bodies & others
- Technical feasibility
- Financial Feasibility- Finance needed and whether the product is financially viable, Start of revenue generation
- Limitations- During study
Make Feasibility report more effective:
- Executive summary should be to-the-point
- Language of the report should be easy to understand
- Primary or secondary data sources, if any, should be mentioned.
- All the dimensions which may affect the business positively or negatively should be considered.
2.Develop a business model and business plan
Business Model –
Revenue generation model and Initial target market are its key components. Revenue model should give fair idea of “From Where sound and consistent revenue can be generated and How”. Initial target market says “Who are the customers, how their needs can be fulfilled”.
Business Plan –
The business plan is very essential from company’s future point of view.
Requirements are –
- NO Bias:- It should be unbiased and disclose all the weaknesses and challenges.
- Dynamism:- The business plan should be dynamic/flexible and if possible auto-adjustable.
- Well communicated to the managers:- the Business plan should be framed in consultation with the internal managers who have a responsibility to get it executed successfully.
- Authority should match responsibility:- it is also a requirement that managers should be given required level of authority so that they can execute their responsibility.
- Estimation of “Near to Right” amount of capital needed:- Company may plan for new product development, exploring new technology, exploring new marketing channels etc. For all these it needs capital. The company should estimate at least “Near to Right” amount of capital to achieve the above.
- Study of a trend in the industry:- Another requirement of setting growth-oriented business plan is that the company should study and analyze the past, present and expected a future trend. Main trend parameters may be-
1. Product changes in the past
2. Pricing of the product
3. Changes in export market demand
4. Entry of new competitors
5. Expected variants in the products in future etc.
7. Right identification of “KSF” & Triggers and possible changes in future:- Identification of right KSF and trigger points is also required for setting up growth-oriented business plan. Over a period of time, these may change therefore, there should be the proper track of it.
3.Designing a pitch deck
A pitch deck is usually a 10-15 slide presentation designed to give a short summary of the company, business plan, and startup vision. Pitch decks also serve very different purposes, from trying to get a meeting with a new investor, to presenting in front of a stage, and each one of them should follow a different structure. A pitch presentation should be completely self-explanatory.
Pitch deck should be prepared as a one-page word document and power point presentation slides.
There are two types of investors- “pure financial investors” and “Strategic investors”.
Pure financial investors don’t poke their nose into the business strategy and operation. They will be happy with a small equity stake in your business but they will require the much higher return and will prefer to exit from your business as early as possible after making money. Strategic investors are different. They will assist you in the business strategy and operational matters. They will be happy with relatively lower return (but more than average market return) will prefer to stay in the business for a long-time period. They will prefer to exit from the business after getting significant capital gain or will acquire the business later on at premium price.
5 .Sorting out of investors
It is not a good idea to approach all prospective investors; be it a financial investor or strategic investor. They need to be sorted out.
Let’s see what may be the general parameters on which you can sort them out:
- Are they talking about too much on financial returns?
- Are they discussing too much on exiting from your business?
- Have they invested in past in related or any other business?
- Do they want to keep their nominee director on board?
6.Approach, Negotiate & sign MOU
It is good to approach few investors say 2-3 initially. Take a fair idea that what they want. Convince them that you need “this amount of finance at this given stage”. Negotiate on their expected return (of course they will demand higher one). Some of the investors will demand much higher dividend once your business becomes profitable and on top of it higher capital appreciation while exiting from the business.
It is imperative to have an MOU signed with investors.
To conclude –
If sound planning is done before approaching any investor then chances of failure are close to NO. In nutshell, “plan to fund” not “fund to plan”.