How to Get Startup Funding – 6 Steps Complete Detailed Guide

In this detailed Article, I will talk about How to get Startup Funding. As an Entrepreneur, you must be asking one question all the day- how to get investment for my startup or how to get investors for my startup business?

So, after reading this Detailed Guidebook, you will better understand fundraising. You will get to know how to get seed funding and how to raise money for a startup.

Raising funding is a very critical step for your startup growth. Indian Startup raise almost billions of Dollars funding every year. There are various reasons why you need to raise funding from an external resource like Angel Investors or Venture capital. As an entrepreneur, you need funds to start, run and grow your Startup.

Never approach an investor for funding just because you are running a startup, so you should always raise the funding. Most entrepreneurs think that they are starting a startup so they should raise money, but it’s not like that. You should not reach out to investors just because of this reason.

It is always recommended that you only approach the Investors when you genuinely need funds; otherwise, bootstrap is the best option.

All big companies like Microsoft, Google, and Facebook bootstrapped in the beginning. So, self-funding is the best option for your Startup in the beginning.

Before I tell you How to get Startup Funding, first understand this thing: The investor who invests in your startup is not in the business of making your business work. He is in the business of making money and exiting the business.

Please understand, sometimes (most of the time too!), investors invest the money that is not their money, they raise money from some external partners like LPs (Limited Partners) and when they raise the money from them, they promise to return that money to them with some profits and that why they enter into your startup and invest seeing the potential growth. They make money from a startup and exit. OK?

So better think like an investor and put your feet in his shoes and imagine if you would be the investor then what all things you will check before investing your hard-earned money into a startup. And when you see the things from the eye of an investor, you get a lot of answers.

One more thing, when you raise funding from an investor, you signup to raise money constantly because this is the only parameter that tells the investor that their investment is growing and they can expect a good return on their investment.

If your startup does not grow then investor(s) urge/force you for the merger or sell it because they need the return on their investments.

Alright! Ok, so let’s move ahead.

Why You Should Raise Money for Your Startup?

When you approach an investor or VC for the funding, the first question they ask is, “Why do you need this money?” This is the question you should answer very carefully and genuinely.

It is crucial that you must have a detailed understanding of your financial needs. You should know why you need funds, how much you need, and how you would spend those funds in your business. You should have a fixed figures for this.

It would be best to have a detailed financial and business plan before you approach an investor. When you raise money from an investor, you need to tell him how you will make money and when & how you would return his money. And for that Investor, asks your business plan.

First, Let’s Understand the Common Reasons Why an Entrepreneur Raises the Funding-

• Product Development- A Startup may need funds for product development. You have a prototype ready, and you have successfully tested that in the market, and customers liked that. Now, you need money to develop a full-fledged product to launch it in the market.
• Hire Team- Your Startup has got some traction, and the business is growing; this is the time you need money to hire more key people to fulfill the business demand.
• Technology Development- you may need money to develop a technology that can help your Startup grow fast, and you can make more money with that development.
• Production- you need to purchase raw materials o equipment for the production. You have got huge orders to fulfill want to scale the production of the products or services.
• Marketing- You need money for marketing and promotions. No matter how good your products or services are until you reach the customers. So you need funds for the marketing & promotions.
• Working Capital- you need money to carry out the daily operations.
• Scaling- you are doing good and making enough revenue. Now, you need money to scale your business in different markets.

There are many other reasons why you may like to raise funds but remember, you should have a genuine need. You should have enough reasons and factors to convince investors why they should invest in your Startup.

Types Of Business Funding-

Debt Financing – Debt financing involves borrowing money and paying it back with interest. Invested Funds to be repaid within a stipulated time frame with interest. For a financier: The lender has no control over the business’s operations. For a Startup: You may need to provide a business asset as collateral.

Equity Financing– Equity financing involves selling a portion of a company’s equity in return for capital. There is no component of repayment of the invested funds. For Financer: There is no guarantee against his investment. For Startup: Startups need to give up a portion of their ownership to shareholders.

So now you have a better understanding of the types of funding. You should choose the one very carefully.

Now let me explain the steps to raise funding for your startup.

Steps for How to Get Startup Funding or Seed Funding-

Step 1- Evaluating the Need for Funding-

You should do some homework for the fundraising in this step.

First, make sure you have complete knowledge of the following things-

1. Why do you need the funds? You should have a clear and valid reason for fundraising. You should be aware that the Startup is ready to raise funds or not.
2. How much money do you need to raise? You should be aware of the exact amount.
3. How would you spend that fund? It would be best if you had a detailed plan of how you would spend that money.
4. How would an Investor get that money back? You should have a clear revenue projection on how you would make money.
5. A clear plan for all milestones you wish to achieve with that funding in the next 1,3,5, and 10 years.

Step 2- Get The Startup Ready For The Funding

Before reaching out to an investor, this is highly recommended that you should make your Startup ready for funding. Many entrepreneurs & founders make the mistake that they are approaching the Investor without making your Startup ready for the investment.

So, here are the few things you should always take care of first

The first thing is, you should be aware if it is the right moment, you should raise the funding? Do you have enough traction to convince an investor? Do you need funding? These are the basic questions you should ask yourself before reaching out to the investors.

1. The Team- Each member in your core team should have the competency to work in the Startup. It would be best to have a clear job description for each Founder. The founder team should have a single and clear vision for the startup.
2. Business Model- you should be fully aware of your business model. How does your Startup make money? Moreover, the business model should be scalable.
3. The Traction- As an entrepreneur, you should be aware of your traction, like how much revenue your Startup generates, How many customers you have acquired, What is the customer acquisition cost, customer lifetime value, Customer retention Cost & Net Promoter Score. You should also be aware of your app downloads, Website Traffic, social media presence, etc.

For this, you should capture all the details of all these. It would be best if you used good accounting software, CRM & Social media tools for this since the beginning of your Startup.

5. Prior Investment- You should be aware of how much funds you have raised and invested so far? How did you invest that fund? What is the outcome? Is your Startup bootstrapped, or have you raised an investment from an Angel Investor?
6. The Equity- You should know how many shares every Founder has and how much you are ready to liquidate to raise the funding.
7. Your Competitions- You should know who your competitors are and how they are doing? What is your USP? Why should a customer purchase from you and not from your competitors?
8. The Pitch Deck- You should prepare a Pitch deck for the investors.

Step 3- Preparation Of Pitch Deck

So, what is a Pitch Deck?

A Pitch Deck is a presentation (Generally PowerPoint Presentation) that founders use to raise funds. It generally has all the information an investor wants to know before making an investment decision.

Generally, a Pitch deck has the following information

1. Your Business Details- Your Startup Name, Logo, Contact Details, Website, App, etc.
2. Your Team- You mention all your core team members with their expertise and also explain what team members do in the Startup and why they are the best for the role
3. A Problem Statement- What problem have you identified? And how people were solving that so far.
4. Your Solution- what is your solution to that problem, and how is your startup solving that problem?
5. Your Product/Service- You should talk about your product or Services. Emphasize more on how your product/service solves that problem rather than your product/service features.
6. Market Size- How big is the market? Market Potential. What is the Total Addressable Market (TAM)?
7. Your Market Positioning- How big is the competition level, and what is your USP? Is anyone else already solving the problem? If yes, then what makes you different from the competition.
8. Your Business Model- How do you make money?
9. Current Traction- How much revenue have you generated so far and in how much time? The customers you have acquired? Your customer acquisition cost, Customer retention cost, Customer Lifetime Value & Net promoter Score? App Downloads, Website Traffic, etc.
10. Projection Revenue Overview- Your planning for the future to generate revenue. Where do you see your Startup after 1,3,5 & 10 years?
11. Funding Needs and Use of Funds- What exact amount do you need, why you need and how would you spend that fund?
12. Exit Options- What are the exit option you have for the investors. How much money your Investor can expect compared to the amount they have invested?

Download the sample Pitch Deck from youcanstartup.co/resources

Step 4- Finding The Right Investors

Once you have done your homework and the Startup is ready to raise funds, the next step is to find out the investors to raise funds.

The biggest mistake many founders make is their goal is just to raise funds; they reach out to everyone. They hardly think if they are approaching the right Investors.

Never run just after the money; always consider a few more things before reaching out to an investor-

1. Right Industry- Is the Investor interested in your market? A lot of investors prefer to invest in some specific market like EdTech, Healthcare, Technology, etc., so approach the Investor who may like to invest in your industry
2. Their Track Record- As like Investor takes care of many things before investing in a startup. Similarly, you should also consider who you should raise funds from?

Many investors make your life hell once they invest the money in your startup; they interfere so much in daily operations and would like to take every decision themselves. And, a Founder becomes a puppet for them.

So always look for an investor who is ready to invest and provide proper guidance. They are ready to give you freedom. So talk and discuss these things clearly with the Investor.

3. Past Investment- Check out their past investment and the outcome. Talk to the startup founder they have invested in and find out if their decision was right or not.

You may also reach out to the Governemnt for funding, There are lot of Funding Scheme Governemnt runs to help the Startup

Step 5- Due Diligence By Interested Investors

When you successfully get an investor or VC ready to invest in your Startup, the first thing they do before signing on the cheque is due diligence.

So What is Due Diligence?

Due diligence involves the review of a Startup’s Assets, liabilities, and Finances. The Investor gets the audit done before making an investment decision. They check the level of risks involved in an investment.

Due diligence is required to ensure that the Founder has made the right claim about the Startup.

Please understand one thing- an investor is taking a risk by investing in any startup. They don’t want to invest their hard-earned money in a startup that has no future.

So never claim anything false. I have been the part of many investor meets where the investors got ready to invest in the Startup but eventually drew it back because Founders represented false traction or facts, and they failed in due diligence.

So, it’s better to present actual facts about your Startup before investors, and your Startup is ready to fulfill their minimum expectations.

Also Read: Types of Loans and How to Get the Business Loan Easily

Types of Due Diligence-

Tax and Financial Due Diligence- This due diligence is carried out to find out the current financial position of a startup, cash flows, liabilities, and scalability.

So, you should be ready with a copy of the audited financial statement of the previous years, copy of income tax return, bank statement, CIBIL report, Financial Projection Report, Assets & Liabilities Report, etc. because the Investor may ask for these documents.

Legal Due Diligence- This due diligence is done to ensure the legal position of a startup. Suppose the Startup is following all legal compliances and other rules & Regulations of the Government. They find out if Startup has all the required licenses, permissions, etc.

So, you should be ready with Memorandum of Association, Articles of Association, All Licenses copies, real estate agreements, vendor agreements, Founder’s agreement, office & equipment lease papers, Founders personal Details, Certified original copies of all RoC filing, etc.

Technical And Intellectual Property Due Diligence- This due diligence is conducted to analyze the technical aspects of the Startup.

Nowadays, it is very much necessary that a Startup should be technically strong.

So, make sure your Startup is technically strong and using the latest technology. You must have all the necessary intellectual property rights to safeguard the Startup in the future.

So, you should be ready with a copy of Trademark registration, copyrights, any patent filing document, online security licenses, etc.

Human Resources Due Diligence- This due diligence is done to ensure that the Startup fulfills the government rules & regulations regarding labor law and other policies.

So, you should be ready with Employee details, payroll details, Employment contracts, schedule of ESOP, and other HR-related Documents.

Product & Service Due Diligence- An Investor finds out how your product & services work and what is the potential in the market.

There are many other factors investors look into the Startup before making the final decision for the investment.

If the due diligence is a success, the funding is finalized, and they sign term sheet.

Step 6- Term Sheet

What is a term Sheet?

A Term Sheet is a non-binding document that defines the terms & Conditions offered by an Investor or VC. A term sheet provides the guidelines on how both parties will act to safeguard the investments.

The Investors and VCs generally make a Term sheet. It is prepared before the final agreement to be ready for the investment.

It is crucial to understand the technicalities of a Term Sheet and the terms linked with it. If you are not sure enough, hire an expert who can explain this in detail.

Generally, a term sheet consists the terms like Startup Valuation (Pre-Money valuation & Post-Money Valuation), Number of shares given to investors, Price per share, investment structure, dividends, exit terms, etc.

What do investors look for in startups?

As an entrepreneur, you should know what investors look for in the Startup before making any investment decision.

Please understand this, an investor’s only goal to invest in a startup is to get a good return on their investment.

So here are a few things Investors Look for in a Startup-

Management & Team– This is the first thing they look for in many Startups. An Investor does not invest in a startup just because the product & services are unique, the market is big, or the Startup has good traction. They first check if the Team is strong enough to carry out and grow the business successfully. They check if all the founders and Core Team members are working towards a single goal and harmony among them.

So, make sure you have strong people in your core team to convince enough investors.

Objective & Problem Solving- an Investor checks what problem a Startup is solving and how big the problem is? If the product or service meets the customer’s need or not.

Scalability & Sustainability- the next thing an investor looks for in the Startup is the scalability & Sustainability of the business. They only invest in a business that is scalable to get good returns on their investment.

Customers- They check your targeted customers and the customer’s past, current, and future need for your product & Services.

Market Positioning- An Investor ensures that Startup has the potential to make a market positioning. They understand the competition and ensure that the Startup has its own USP.

Market Size- They check how big the market is. They ensure that there is enough demand for your product or services.

Financial Assessment– They look for traction in a startup. The look for the detailed financial business model that showcases cash inflows over the years, investments required key milestones, break-even points, growth rates, etc.

What Questions Investors Ask The Founders

When I started my first Startup and approached the investors, the biggest mistake I did that I was not aware of the questions the investors asked, so I was not ready with the ready answers. As a result, the whole investment round went like hell.

Before reaching out to investors or VCs, you should know the common questions an Investor asks. You should be ready with convincing answers to these questions.

The one thing which I would like to suggest is that do not fool around the investors. Do not provide any false or wrong information.

You should answer all the questions ethically because somehow you convince the investor in your funding round, you will get failed in the due diligence when they verify all the facts. And, if they found that you have provided wrong information and cheated them, then it can ruin your whole image so never do that.

So here are the questions-

General Questions Asked by Investors?

1. How big is the Industry and Category in $?
2. How fast is the Industry / Category growing?
3. How much market share does the Startup have?
4. How much market share can the Startup get? 274 | You Can Startup
5. How much time will the Startup need to reach there?
6. What are the entry barriers there in your industry?
7. What all are the biggest challenges you facing in running the Startup?
8. How do you overcome these challenges?

Questions Asked About the Startup

1. What problem does your Startup solve?
2. Who are all your targeted customers?
3. What solution does your Startup give for that problem?
4. What service or product does your startup offer?
5. What is your business model?
6. What is your USP? What makes you different from the competition?
7. What are the customers like most about your product or service?

Questions Asked About Traction

1. How much revenue are you generating?
2. What does the customer acquisition cost?
3. What is the customer retention cost?
4. What is the Customer Lifetime Value?
5. What is the Unit Economics?
6. What are the Gross Revenue and Net Revenue of the company?
7. What are the Projected Cash Flows?
8. When does the company reach the break-even point?

Questions Asked About Founder

1. Who all are the Founders in the Startup?
2. How much experience a Founder has in the industry?
3. What is the complete background of the Founder?FUND-RAISING | 275

Questions Asked About Team

1. How many people are there in the core team?
2. What talent and skillset do they have?
3. How many people are required in the future?
4. How will you source them?
5. Does the Startup have an ESOP Pool and policy?
6. How do the Co-Founders know each other?
7. What is the Equity split in the company?

Questions Asked About Competitions

1. Which other companies compete with your Startup?
2. What market share do your competitors hold?
3. Have you conducted any competitor research?
4. What is your competitive advantage?
5. Has any other company failed in executing the same Business Model?
6. What was their reason for failure?
7. If there is no competition, then why so?

Final Thought-

You should never run behind the valuation and funding. Don’t build your business for investors. Instead, build it to solve the problem of your customers – Vikash Sharma