Important Questions to Ask Before Seeking Startup Funding

Important Questions to Ask Before Seeking Startup Funding

Important Questions to Ask Before Seeking Startup Funding

Startups are becoming increasingly ubiquitous, with nearly 5.4 million new business applications in 2021, according to data from Census Bureau’s Business Formation Statistics.

It can be challenging to convince investors to fund your project in such a saturated market. Before seeking funding, make sure you ask the right questions and are as prepared as possible.

1. Do you Have a Viable Business Plan?

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Before seeking out funding for your startup, the most important thing to know is how your business will be making money. It is great to have a creative and innovative idea, but to have a viable business model, you will need to know how profitable the idea is and whether it can make you money in the long term. 

This is especially important when seeking funding, as you will have to demonstrate to potential investors that your business model is not just feasible but profitable. Potential investors will want to see a step-by-step plan to explain why the company is profitable and at what stage they might expect to see a return on investment. The more detailed your business plan is, the better your chances of funding will be. 

Support your business plan with calculations, including any real-life data until this stage, and forecast and justify your forecasted calculations. From the earliest stages of your company, keeping a careful record of metrics, cash flow, and finances will serve you in good stead. This shows investors that you are responsible and take your business seriously. It also helps them get an accurate picture of the company's revenues and the actual cash flow.

2. How Much Money do you Need?

As part of your business plan, you will need to decide how much investment you need to fulfill your objectives. Thorough forecasting and budgeting will help determine this figure. It will give you an accurate overview of your current financial situation, at what stage investment would be most beneficial, and how much you will need to achieve a specific outcome. 

Draw up a budget for your business using existing data on cash flow, sales, and monthly expenditure. When making the budget, be careful not to leave anything out, including any capital costs. It can be a harsh wake-up call to start keeping a detailed record of your finances, mainly if you have not recorded cash flow up until now. However, the more realistic you are, the better you will be able to predict and plan for the future.

Having a realistic idea of how much money you need will help your success rate with investors. It is crucial to only ask for precisely the amount of money you will need. You will need to justify any requests, usually with a detailed breakdown, but it will also stop you from overspending and getting into debt.

3. Why are you Seeking Funding?

When seeking funding, be prepared to answer any questions about the purpose of the investment and how you will be spending the money. Understandably, anyone investing in your business will want to know where their money is going, so the more detailed you can be when requesting money, the better your chances. 

It can be tempting to paint your business in a better light when presenting to potential investors. However, if you are honest at this stage about the potential challenges your business may be facing, it will be better for you in the long run. 

Showing investors that you are already proactively predicting future problems and how you might solve them presents you in a good light. Additionally, depending on who you are asking for funding, they may be able to offer their expert opinion.

4. Who are you Approaching?

Knowing the type of funding you seek will help guide your search on who you will be approaching to ask for investment. The more thorough your research on this change, the better suited your prospective investors will be. Seek out opportunities where you might be able to meet relevant investors in an organic setting. Research goes a long way when approaching any investor, be it in person or via LinkedIn; make sure your network meaningfully and approach investors who already have experience in your sector.

If you successfully get to the stage where you pitch your company to potential investors, make sure your pitch is informative, engaging, and personalized. Tailor your pitch to match your audience, considering their previous investments, sectors they have worked in, and even any biographical information that could aid your pitch.

5. At What Stage are you Asking for Funding?

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Your business will have different needs and priorities depending on the stage of development. Thus, knowing at what stages funding will be most appropriate will help you in your plan to seek out investors. For example, startups commonly spend more than they earn in the initial 2-3 years. That means that funding is probably most helpful after the point of breakeven. 

If you have a company whose business is more seasonal, specific year periods may require a financial boost. Similarly, if you have a clear objective for your company, like expansion into a new market or growing your team at a specific time, that would be excellent to receive funding. 

This information will be part of your detailed business plan which means that you can start planning your investor search with plenty of time. Approaching an investor at an inopportune moment could minimize your chances of success and potentially burn a contact that could have been useful in the future.

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Luke Fitzpatrick

Tech Expert

Luke Fitzpatrick has been published in Forbes, Yahoo! News and Influencive. He is also a guest lecturer at the University of Sydney, lecturing in Cross-Cultural Management and the Pre-MBA Program. You can connect with him on LinkedIn.

   
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