Around 20% of small businesses fail in their first year. Here are guidelines for staying afloat, from how to secure funding to investment pitfalls to avoid
According to research by global startup funding network Fundsquire, around 20% of small businesses fail in their first year, and 60% fail within the first three years. The most common reason for failure is running out of cash. From how to secure funding to the investment pitfalls to avoid, here's a guide to staying afloat.
Understanding funding cycles can help startup founders to identify the right investors to target.
While pre-seed funding refers to the finance used to support company concept creation and is often supplied directly by the company founder, seed funding is the first official round of investment to launch a company. It covers requirements such as the employment of a founding team, market research and product development.
Interestingly, while most businesses (38%) fail because of a lack of capital, the second most common reason (35%) is that there wasn't a market for the product, which shows how essential market research is.
Series A, B and C funding are given to businesses that have established a customer base and consistent revenue, which are ripe for growth. Whether growth entails expanding into new markets, increasing production to meet demand, developing new products or even acquiring other companies, it's essential to have a business plan that clearly shows how growth will be achieved with funding.
How to pitch your business
Create a winning presentation – there are pitch deck presentation templates available on software packages such as Powerpoint – and then practice it until you've memorised it. Cash-rich investors are usually time-poor, so make your pitch concise.
Creating pitches for different occasions and windows of opportunity is also wise. Businesses seeking investment commonly have a 30-second' elevator pitch', a 10-minute pitch, and a more detailed pitch around an hour long.
Traditional storytelling is a compelling and formulaic tool to use when structuring a pitch. Lend from classical narrative structure, which comprises three parts: the set-up, which is where you can establish who you are and your goals; the obstacle, which outlines the problem or demand that your product or service will address, followed by the resolution, which is how your product or service will work to hopefully make the world a better place.
Whichever way you pitch your business, be prepared to do it hundreds of times. CEO of UAE-based GrubTech Mohamed Al Fayed says: "Rarely does anyone talk about mental fortitude of raising capital and the mental wellbeing of a founder. I'm not embarrassed to say this at all; in the last round, we got 187 no's before we got our first three yeses. And these no's – especially at the beginning – are devastating."
Where to find investors
Pre-seed and seed funding can be sourced from family and friends, bank loans and local
startup accelerator and incubator programmes. These programmes generally give startup founders the opportunity to pitch to an audience of potential investors. Successful candidates often receive ongoing support and advice for product development, sales and marketing.
For A-series funding rounds, it's increasingly common for companies to use equity crowdfunding portals, such as Kickstarter. More than three million people pledged more than €767 million to Kickstarter creators in 2021. When businesses have failed to attract interest from venture capitalists (VCs) with products that consumers genuinely want or need, crowdfunding portals could be the way forward with many sourcing funds directly from the public.
When seeking venture capital, targeting and securing one key investor and their using their endorsement to attract others is a typical strategy.
One way to meet several VCs is at industry events within your chosen field. Event organisers host conferences inviting investors to meet with business leaders through a series of networking activities. Another way is cold-calling, cap in hand.
Al Fayed's GrubTech is an established plug-and-play, end-to-end operating system for restaurants and cloud kitchens that has benefited from several rounds of funding. "We've had a total of €17.4 million invested over those three rounds: seed, pre-seed and official series A. How did we gain them? [We went] hat in hand and knocked on doors," says Al Fayed.
Ahead of calling, Al Fayed recommends you do your homework. "What is the portfolio of companies of that VC? What do they like to see? Is a growth? A path to profitability? Who are you speaking to? Can you get a referral from somebody that person knows? It makes a conversation a lot easier than just going in and saying, 'I have an idea. Can you give me some money?'."
No matter how many times a business is rejected, Al Fayed believes there's always light at the end of the tunnel. "Somebody will eventually say yes," he says, "you just have to have the stamina and the grit."
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