2- Preparation for Fundraising
This article is part of
Accessing Finance in Jordan
A Guide For Entrepreneurs
Establishing a successful business, while a potentially rewarding undertaking, can be a long and painful process, made all the more difficult by the limited access to funding at the beginning of an entrepreneur's journey. It is, however, vital for entrepreneurs to understand that external financing is not usually a necessity in the early stages of a startup, and that in some cases it can severely hinder its growth.
In the initial stages of your startup, you will need to focus mostly on your feature product or service, and investing your existing finances, time, and resources into its refinement—this is what will ultimately attract investor attention—instead of trying to identify your next source of funding.
External funding will also present its own challenges and associated risks. As an entrepreneur you can shield yourself from a great degree of such risk and save a lot of money, time, resources, and heartache if you follow a structured plan to get your startup off the ground.
While there is no step-by-step guide for entrepreneurs to follow, you can benefit from taking note of the following process:
1. Validate your idea
Startups spring from ideas that seem convincing to entrepreneurs. Such ideas or propositions can be based on varying levels of prior experience, knowledge, or understanding. As an entrepreneur you should seek to validate (i.e. verify) your business idea before seriously beginning work on your startup or making any commitments, especially those that are financial. This can be done through simple but thorough market research on the internet as well as receiving input from your network and/or other players in the market. You should seek to conduct interviews and discussions with knowledgeable market players (thought leaders, established businesses, future competitors, etc.) and potential customers, in order to gauge your idea's market potential before you begin working on it.
2. Evaluate your chances
Your idea can eventually become a viable, thriving business. Before it does, however, you need to ensure it has enough potential to generate sufficient revenues and can survive the ups and downs of the market before investing your time and other people's money. Larger and more powerful competitors can deploy a product or service similar to yours more quickly, at a much cheaper rate, and to a greater number of customers. You need to evaluate the chances of this happening and the risks they
pose to your idea or business.
It is recommended that you analyze your competitors (other businesses and organizations that may provide similar products or services) in the market to better understand what the competition offers and what it doesn't, and how your startup can either fill gaps or deploy better products and services.
3. Assess the requirements
If you determine that there is indeed potential for your product or service in the market, you will need to thoroughly assess the requirements to turn your idea into a business, financial and otherwise. Before investing time, money, and resources, you will need to have rough answers to the following
4. Operationalize your idea
If you determine that you do indeed have the necessary ingredients to take your idea to market, you can begin to turn your idea into reality.
5. Find a suitable accelerator or incubator
At this stage, you would benefit from the support and guidance to turn your idea into a real product or service. You should consider whether you would benefit from enrolling in an accelerator or incubator. They can support you in developing your idea into something tangible, provide you with dedicated and relevant expertise, and direct you to financing opportunities, in addition to other types of support. You should do your research on such entities before applying, in order to determine their added value for your specific startup.
6. Establish a Minimum Viable Product (MVP)
In order to test your idea, you will need to establish a prototype, or Minimum Viable Product (MVP). An MVP is a basic pro uct that allows you to generate initial feedback from customers and assess whether your idea works as you imagine. Creating an MVP should present a minimal expense, and should be quickly adaptable depending on the requirements of the market. In addition to enabling you to understand the needs of your clients, an MVP can help you demonstrate to investors and relevant stakeholders that you have a product that can generate sufficient traction and be the basis for a successful business.
7. Generate a user base
You will need to expand your number of clients in order to begin to generate much-needed revenue and further illustrate growth to investors. The greater the number of users your startup has, the greater the revenue and the more valuable the insights they provide on your product. Additional users will be able to inform you on your most vital metrics, including whether or not your customers buy from you again (retention rate), if you sell other products or services to them (cross-selling), and if you persuade your customers to buy something additional or more expensive (upselling). Other customer feedback, including complaints and recommendations, will also provide you with valuable insight. Such information is vital for investors and funders to help them assess the viability of your business and its anticipated growth trajectory.
Once you are convinced you have a viable business and it is growing, you will likely need to secure external funding to continue your growth. If at this stage you do not have the sufficient level of capital required (and most entrepreneurs will not), you will need to have a very clear idea of how much you need to fundraise and for what.
You will need to know what the valuation of your startup is and what various funding modalities will mean for your financials and your future growth. You should also be aware that not all investors and/or investments will ultimately help you grow your startup; while some investors may provide the required guidance and market access, others may renege on their contracts and demand unfavorable terms. As an entrepreneur you will need to undertake extensive research on potential investors, identifying their strengths, weaknesses, and associated risks prior to approaching them or agreeing on any terms, including giving up some equity and diluting your ownership. In the sections 'Financial Instruments', 'Raising Capital', and 'Investment Timeline', you will learn more about what to look for in terms of financing options, investor types and actual sources of funding.
There are other aspects of starting a business that you will need to be aware of along your journey, and which are not necessarily sequential in nature. They include:
Networking with relevant individuals (including your peers, prominent experts, and potentially, funders) and entities (including support organizations such as business associations, incubators, and accelerators) is vital throughout your business development journey. It helps you validate your ideas, assess the competition, and ensure that you exhaust all opportunities, including those related to fundraising. Startups, especially tech-oriented ones, operate in a rapidly changing market—networking will help you remain relevant and up-to-date. Networking will also help you, in case you are a sole founder in the initial stages of your startup, discover potential co-founders or talent to support you in running and expanding your startup.
The Founding Team
During the initial stages of the startup, you and your founding partners will need to be involved in all aspects of the business, including design, budgeting, marketing, fundraising, negotiating contracts, etc. Having a strong co-founding team from the outset will help you significantly along the way. Due to a probable lack of funding during the initial stages of your startup, you cannot outsource or hire new employees to fulfill many of the aforementioned functions, and you and your partners will be forced to multitask. While such aspects of running a business can be extremely demanding, they are part of a natural process, allowing you and your partners to save costs and money, while also immersing you fully in all aspects of your startup.
Registering a business under the right formation is crucial for its success. The type of company you register as can affect how much funding it can raise, its ownership structure, the taxes it pays, the minimum capital it's required to deposit, and its liability in case of bankruptcy. It's crucial for you as a founder to understand the advantages and disadvantages of each type of company formation before formalizing and registering. A good resource to use that will help you in understanding the process required to register a business is the "Start-up Guide"
While you may begin to build around your idea based on the perceived needs of the market, you should be open to the possibility (and probability) that your idea and product may change. That means that you will need to pivot at a certain stage in the future, and sometimes sooner than you think. Many of the largest startups in recent memory, including YouTube, Slack, Airbnb, and others, started out with an idea and had to pivot to something completely different down the line. In the case of Slack, the platform initially started out as a gaming company, before pivoting into an online platform for team collaboration; in 2019 it was valued at USD 23 billion
An approach to managing finances and operations all entrepreneurs should be aware of is bootstrapping— the reliance on your and your partners' limited and existing resources, including savings and assets. As a founder you will have to exert every ounce of your ingenuity, grit, and foresight to save as much money as possible, not give up too much equity and/or take on too much debt, while at the same time growing your startup. While bootstrapping is a fundamental requirement of most startups' success, it is not a permanent approach, and as an entrepreneur you should have an idea when it should be drawn to a close.