.png)
Entrepreneurs seeking finance for their start-up businesses may find it challenging to find early-stage investors, such as angel and venture capitalist investors, and even if they do, securing investment cash from them may be tough.
Angel investors and venture capitalists (VCs), on the other hand, are taking a big risk. New businesses often have little or no revenues; the founders may lack past management experience, and the firm strategy may be based only on a concept or a primitive prototype. There are several convincing reasons why venture investors are frugal with their funds.
VCs continue to spend millions of dollars in tiny, untested startups in the hopes of turning them into the next big thing, despite the huge risks. What motivates venture capitalists to reach for their wallets?
The process for estimating the worth and investability of mature businesses is straightforward. Established firms produce sales, profits, and cash flow, all of which may be used to create a fairly accurate assessment of value. Early-stage businesses, on the other hand, need a lot more effort from VCs in terms of getting inside the firm and assessing its potential.
Investing in Startups: How to Make Money
You engage into an investment contract with a startup when you invest via a crowdfunding platform. There are four types of investment contracts in general, each of which provides distinct opportunities to profit from your investment:
• Debt- This contract handles your money as though it were a loan with interest. The contract may pay a fixed or variable return, such as two times your investment. The timing of interest payments is determined by how well the firm operates over time.
• Convertible note- This contract is a kind of debt that turns into shares of stock when a firm achieves specified milestones, such as raising further rounds of investment. When the business is bought by another firm or finally goes public, you profit from your investment.
• Stock- Later-stage businesses may allow you to purchase equity in the firm, similar to how you would with a publicly listed corporation. Just keep in mind that you won't be able to sell your startup stock. You must hang on to your shares until the business goes public or is bought by another firm in order to profit.
• Dividends- Successful later-stage firms provide investors with the opportunity to purchase dividend-paying stock.
We must ensure that the opportunity makes sense both strategically (with a validated product and a compelling and competitive go-to-market strategy) and financially before making an investment choice. Then we'll walk you through our 10-step process to ensure you're investing in the correct business. Let's get this party started!
STEP 1- Considerations for the start.
Make it clear throughout the launch discussion that you will do a speedy assessment track before reaching a choice that will benefit both sides. This provides peace of mind for your company, and it's a useful validation exercise that strengthens the partnership for the endeavor!
You'll show the ventures what wise capital means to you if you follow these methods! Make sure they realize that you'll be putting the'smart' on the table before the 'capital.' Keep in mind that before making a formal/financial commitment, you will be making a significant investment of time, energy, and information by following this program.
STEP 2- The plan and the goals.
What is your motivation for wanting to invest in a business? Remember that there is a significant initial investment of time, energy, and expertise before money is involved, therefore identify the organizational objectives and anticipated results of this process before entering into the investment assessment.
This will be the starting point for determining the best method to take in order to achieve these goals.
Defining your aim will help you make better decisions later on in the process and prevent you from spending time or money on prospective partnerships that don't help you achieve your goals.
STEP 3- This is the pitch.
The pitch is a critical first step in establishing a formal connection for analyzing a venture's financial possibilities.
Although it may be tempting to just have a casual conversation with the entrepreneur, it is critical to set a day and time for the pitch and to make it official. You're signaling to the team that they need to come prepared in this manner, which will set the tone for your partnership if you decide to go with the Rapid Investment Evaluation track later.
Make it clear in your pitch briefing what you anticipate to see in their pitch.
Encourage children to be creative with it as well, but these fundamentals must be taught. Observe their body language and ask a lot of "why" questions while they're pitching.
You may be tempted to do so, but refrain. Instead, ask clarifying questions. For the time being, just concentrate on growing the connection.
There are a few no-nos that make us nervous-
Without an NDA, we can't reveal anything. - Before going into the more sensitive investment negotiations, don't sign an NDA. Only sign an NDA if you're sharing very sensitive IP information. If you're going to view numerous rival companies, don't sign an NDA. VCs, on the other hand, do not sign NDAs.
We have a first mover advantage- This normally appeals to investors, but it may also be a negative! Then you're either too early, or your issue isn't marketable. You'll have to put in a lot of effort to educate the market and build the framework for your competition to follow. It's OK to be in second, third, fourth, or fifth place. Make sure there isn't yet a dominating player.
We'll also have this and that feature- There's probably not enough on offer if they don't dare to pare down their answer to the fundamental requirements. It's simple to hide behind feature obsession; anybody can put a ring on a monkey:)
All we want is 1% of this massive market- A big red flag has been raised. You should strive to possess 100 percent of a market segment, and you should narrow your emphasis. Instead of chasing any option that 'might work,' you need a defined objective to shoot towards, especially in the early days.
We have a total of 0 actual customers. We're worth three million dollars- At this moment, squirt water in their faces; they're in desperate need of a wake-up call. Figure out why they believe that. Inquire whether they've pitched for anybody else, and contact their references to inquire about the value.
STEP 4- The sharing of information.
You've viewed the pitch, determined your venture objectives, and chosen to participate in a speedy investment review process with a specific business. What comes next? The sharing of information. To get the cooperation off to a good start, make sure you ask for all of the information you'll need ahead of time — obtaining this information might take a long time.
Document for pitching
A business plan
CVs of team members and an organizational structure
Evidence of traction (customer information, sales references, letters of intent etc.)
Current capital structure and investment
Financial data (e.g., monthly burn rate in €)
All items and services are described in detail.
Information about a supplier or a key collaboration
Information about the law
STEP 5- Evaluation of the maturity of a business venture.
Before investing significant time and energy in the validation phase of this process, you must first determine how much effort will be required for the Rapid Investment Evaluation by determining the startup's maturity, which will affect the amount of resources you will need to invest in the venture validation phase.
Different validation paths would be required for ventures at various stages of development. Startups are inherently riskier, and as a result, need longer time for validation of many areas than Scaleups, which have discovered a market fit and are looking to expand.
STEP 6- Metrics of impact vs. activity
The first goal of every business should be to learn. It should only start profiting after a time.
When you start focused on making money, you begin by doing things correctly. When you concentrate on studying, you begin by pondering what the best item to develop is. That's the kind of attitude we're searching for.
We need to objectively test whether or not the Lean Startup approach transfers to the way the startup is operated, because everyone has read it but no one has put it into practice.
STEP 7- Validation of the venture.
Before deciding whether or not to invest, five factors of the enterprise must be verified.
The length of time you spend in this phase is determined by the venture's maturity. Typically, for an early-stage business, a significant amount of time and money would be spent assessing whether the issue chosen is indeed worth tackling. After you've studied the issue area, you may concentrate your efforts on establishing if the venture's proposed solution is both successful and scalable.
STEP 8- Valuation of a business venture.
When it comes time to talk about valuation, things may become a little tense. There is no "one-size-fits-all" approach to this, and we strongly advise hiring a professional.
The problem is that, whereas valuing established firms using market capitalization and sales multiples is relatively easy, valuing startups is typically more ambiguous and entails not just money but also time and effort.
However, since these talks may happen at any moment, we've put up a few tips to help you keep the conversation focused on relationship development rather than financials.
You'll find links to four typical techniques of venture valuation in the guide.
STEP 9- Criteria for investment
After you've validated the five major features, utilize this checklist to see whether you've addressed the important who, how, and what questions.
STEP 10- The choice has been made.
After you've validated the five major features, utilize this checklist to see whether you've addressed the important who, how, and what questions.