Start-ups are popping up like mushrooms in every field and according to a recent study, over 94% of them fail during first year of operation. Lack of funding turns to be one of the common reasons behind. To create a concrete foundation, start-ups need to maintain financial equilibrium. Funding is crucial for improving technology, hiring the right people, and launching a comprehensive marketing strategy to get a foothold in the market. One of the biggest responsibilities of the owner of a start-up is obtaining the funds needed to continue research and development, and then move their product to market. Obtain alliance and partnerships, find best associates, are the major barriers while seeking the funds. However, accomplishing these always seems to be a headache for entrepreneurs and start-ups.
Here, we have come up with top 5 challenges start-up companies may face in their funding process and the ways to overcome.
Challenge # 1 Lack of clear-to-go market strategy
Many entrepreneurs, step into the funding journey in the fog of uncertainty.They, therefore, approach the investors with the first practical strategy that comes to mind. But having a clear go-to market strategy that demonstrates the potential for the company’s sustainable competitive advantage is of the utmost importance to an investor. Start-ups will need a scalable business model with a clear strategy irrespective of whether they are hoping to expand a small business with a loan or going for a round of venture capital. A perfect go-to-market strategy for any innovation involves making choices about which customers to target, what technologies to apply, what organizational identity to assume, and how to position the company against which competitors. If you aren’t targeting these criteria’s the chances of a successful exit will be small.
Plan a scalable business model, that can increase profits without increasing costs at an equal (or higher) rate. Business model needs to remain aligned with company’s core offerings.
Challenge # 2 Wrong investor selection
Finding funding is stressful. Start-ups and new businesses begin with so much hope, excitement and promise, but the search for capital can be a crushing responsibility that grounds the soaring excitement of starting your own company. To increase your chances of getting the funds, you need to choose the most suitable funding alternative. Sometimes, you may also need to use more than one option to fund your start-up. The type of investor you approach will depend largely on where your company is in its development. There are several funding options (bootstrapping, Angel Investors, Venture Capital, Crowdfunding) available and start-ups will have to make their decision based on their situation. However, there’s a big difference between finding investors and finding investors that are the right fit for your company.
Regardless of what stage you are in – or how successful you’ve been in raising capital in the past – the best way to find prospective investors is join your business’s community. Having a well-established network of friends and professional contacts can increase the chances of finding the right investor.
Challenge #3 Spending spree
Avoid going on a spending spree once you’re funded. If you took investment, you’re accountable to your investors to do what you said you would do with their funds and to be transparent if you’re thinking of changing course. If decided to seek outside the investment, always keep investors in the loop. Keep a clear plan on all the expenses. What you need the funds for and what the returns are going to be and then as soon as the funds are released suddenly, the plans change causes chaos to ensue.
Stick to your plan and spend wisely. If you haven’t assessed your technology needs already, you need to do it before spending the funds. Find out what type of software and hardware upgrades are available for your business and choose the most affordable yet feature-rich options.
Challenge #4 Unclear financial situation
When you are approaching an angel investor to fund your expansion, you must know how much money you need. Most start-ups eager to prove the merits of their great idea, make the mistake of entering the discussion with an unrealistic value of their company. Not being realistic about the financial situation of your start-up from the beginning shows a lack of understanding, regarding your ability to lead a company to a successful return down the line. Ideally, an investor is looking for a company with a clear and scalable business model they can get behind and help grow. . More investment isn’t always better, as it can equate to increased pressure to scale up your business quickly. Result is business will fail because they couldn’t manage the rapid expansion. Ask for money your business needs and can handle.
Keep a realistic financial forecast. You should forecast the expected cost the investment or loan will cover, and the returns it will generate in future. The projected statistics, facts, and figures must have a justification.
Challenge #5 Wrong talents acquisition
The most powerful asset of a start-up is its team. Choosing wrong talents will eat up your valuable time and lead to serious bottlenecks. A lot of start-ups focus on hiring talent but fail at generating the desired ROIs because the team can’t follow through a plan, ending up bearing bigger losses. In other words, putting money in hiring employees sometimes backfires as they fail to yield the result that was expected of them. In such cases, start-ups must bear heavy losses.
Make clear decisions about who to hire as it will be closely linked to the stage your start-up is at. Inventory your team’s skills, compared to the types of work your start-up is doing. Then, as your team’s workload changes, you can identify where gaps are appearing, and bring on additional team members to fill the gaps before they become a major problem. Select candidates based on culture fit, practical fit and their work capabilities, based on your assessment of their practical task.
Funding your start-up or business idea is a tough nut to crack. The above tips will help you overcome the most common start-up funding challenges and secure capital for your business in due time.
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