It is a common myth that every startup needs to raise funds. Fundraising is a dream of all entrepreneurs, but new entrepreneurs need to understand that there should be a reason behind raising funds.
Fundable reports that only 0.05% of startups receive funding from venture capital, while 38% receive funding from friends and family. Hence, we will discuss the possible situations when startups need funding. We will learn what an investor is looking for while funding your startup. Then, we will discuss how funding should revolve around the product. Let’s start digging deep into when a startup should look for funding.
Your Startups need funding?
Before thinking of fundraising, entrepreneurs should ask themselves why someone will be interested in funding their startup? Now, most entrepreneurs assume they have a brand new idea to change the world, and investors will die to be part of their startup. Well, that is what you are thinking, not the investors. Investors care about getting a return on their capital. If you can make investors believe that you are that one guy who can give them immense returns in the shortest possible time, you will get the funding. But, the investors are not fools, and they know when a startup is likely to generate a return on the invested capital. In my opinion, there are only three situations when startups need funding.
A big product
Every startup offers some product to the target audience, which usually starts with a Minimum Viable Product or MVP. Sometimes, even building an MVP requires a lot of money. For example, SpaceX has a vision of making reusable rockets and satellites. SpaceX had to create a satellite, launch it into space, and safely bring it back to the land. I do not need to explain how much money they must have for such an ambitious product. Investors also understand that these kinds of projects might fail. Of Course, these types of projects are rare, but this is one of the situations when startups need funding without even having MVP.
Procurement of large inventory
Keeping an ample supply of the product is necessary for running a business. Since startups are all about growing fast, it becomes crucial to procure a large inventory and sell it rapidly. This process requires a large amount of money that can only come through fundraising. Hence, procurement of large inventory falls under one of the situations when a startup should look forward to funding. Airbnb is an example of such a startup. We know that Airbnb offers affordable homestays for travelers all around the world. To do that, Airbnb first procured homestays around the world and then sold those homestays. More simply, when a startup is looking to reach every corner of a country or beyond borders, funding in such situations is most probably required.
Large customer acquisition
Reaching out to new people and making them buy your product is customer acquisition. Making people trust a new brand is not easy, and that is why startups try to lure people with attractive offers such as giveaways, referral bonuses, customer loyalty programs, etc. These offers can cost a fortune, and hence these types of startups require funding. You must have seen many businesses do this, but I would say that Uber is one of the best examples. Do you remember getting cash rewards after referring Uber to your friends? Well, those free cab rides were a customer acquisition cost to Uber. It worked for them, and they are one of the biggest cab service providers in the world today. The best time to fund your startup would be after a successful MVP launch. You will have positive data that can support your motives behind the financing of the startup.
Numerous factors can cause startups to require funding for growth and expansion if you feel that you are not yet ready and still need to work on your business. To help you better understand your company, we’ve listed a few startup success factors to help you reach a point where your startups need funding from the venture capitals.
In conclusion, there are majorly three possible situations when entrepreneurs need funding. First is building a large product, second is the procurement of a large inventory, and third is adding new customers on a large scale. In simple words, you should be funding your startup for building, procuring, or selling your product. When you look at the bigger picture, all your reasons will fall under one of these categories. You might need to rethink why your startup needs funding if your motive does not fall under any of these situations. I hope you have a clear mindset about the right time for startup funding. Please share it with your fellow entrepreneurs if you found this article beneficial.