How Startup Funding Works

startup-investingYou Have a Startup & You Want Money.

Any business has to start at virtually the same place. They begin their startup journey with a set amount of capital and wish to grow their business with what they have, but the initial capital is not always enough. Unless you have an endless stream of money from an already successful business venture, you are going to have to look for outside sources to fund your growth potential.

Outside investors are not going to take your word that your business will grow. They need something else to back up your claims. They need to know that they are making a sound investment in a company that will ultimately make money even if it is currently not. Here is how startup funding works.

Seeking Out Potential Investors

When starting up a company, your first likely form of investors will come from your own personal family and friends. This will increase your ability to further your company, but it is limiting and can be quite stressful when family gets involved in your business. Once you have exhausted these investments and wish to grow even further you have to seek out potential investors into the company.

Attracting investors is not easy, but if you are looking to compete with big business down the road, it is a step that must be taken. Throughout your business career you will be making contacts with individuals that have influence with high end clients.

Using that influence to garner meetings with them is how you will initially get your name into their minds. It is vital that you present your business along with the investment opportunity in a tactful way. These investors have seen many different pitches throughout their business careers and are not going to waste their precious time just talking to anyone.

How They Will Value Your Investment

It is vital to understand every part of how startup funding works. It is not just about the pitch to the potential investor. If your company has not been in business for many years and therefore do not have the past record of growth to entice the investor. They will evaluate your company based upon its individual valuation. (On a sidenote, you can wear your company’s startup logo on a T shirt and impress investors that way).

A company’s valuation is not based on the past, but on the perception of the future. An investor will look at your company from an idea point of view and evaluate based on what you have already established within the company and what you need to grow further.

A savvy investor understands that the growth of a company is not just about what has been accomplished, but the value of getting involved with a company with a ground floor investment. The investor also looks at the business owner’s past business ventures. Those that have been successful in the past are looked upon as a sound investment and can be trusted with much larger sums of money in the beginning.

The amount of money you are able to gain is not as important as what you plan to do with it. An investor desires to see growth within the first 18 months after they have invested into the company. The investor is given a stake into the company in return for the upfront investment. The growth is dependent upon how the money is allocated and the marketing of the product being offered.

How to Determine Valuation

It is common for people to believe that every idea they have has value, but in the value that you hold for your startup is not as important as how the public will view it and how the investors see the potential for growth. Valuation is actually based upon your competition that sells similar products. To calculate and determine your valuation, you have to find those companies that are similar to your own and look at their past history.

You need to see how many times their valuation determination was larger than their revenue by taking the enterprise value and dividing it by the earnings of the users. This gives you your multiplier which you can use to multiply your revenue by. Using this multiplier, you are able to take revenues from this month, year, and next year and also factor in your best as well as worst case scenarios. When you triangulate the three cases and project when the startup will exit you can discount the earnings by the time value of the money and the final result is your overall valuation.

The entire process may seem a little complicated, but the investors have to know that your company is a sound investment before they are able to release the funds that you need. Understanding how startup funding works is necessary if you are going to attract the right type of investors and get your company off of the ground floor. Once you get funding going, you can invest in a startup accountant and become much more legitimate in the eyes of investors.

Knowing your company’s valuation will show investors that you know how the process works making them realize that you are a hard worker and willing to do what it takes to grow the company. The investors are out there and knowing how to attract the ones that you need will ultimately take you startup to heights you would have never previously thought possible.

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