Money is the life blood of a business. Therefore, raising money becomes an inevitable task for many entrepreneurs. However, many entrepreneurs might get into some misconceptions about raising money. The following 4 misconceptions are the ones that entrepreneurs usually run into.
I need Venture Capital. The successful rate of raising money from VCs is less than 3%. VCs tend to look for large investments with high growth potential, not traditional small business. They also tend to look for companies that are already launched and growing. Therefore, it is difficult for a prelaunch stage business to raise money from VCs. In fact, the majority entrepreneurs raise money from their family members, friends, smaller private investors, and their own savings.
I can acquire funding very soon. It takes time to find potential investors, and those potential investors take their time to evaluate the return of investment. At the end, the entrepreneur negotiates back and forth with his/her potential investors before they reach an agreement that both sides satisfy with. Therefore, raising fund is a long process, and an entrepreneur should take this into account. Many companies spend months getting their funding together.
My company will make X in its first year. Many entrepreneurs are so confident about their products/services that they expect great returns in the first year. However, an undeveloped customer base can pose a bigger challenge than many entrepreneurs realize. Unexpected obstacles at the early stage can also challenge the businesss ability to generate revenue. Therefore, entrepreneurs should make realistic financial projections for the beginning years of their businesses.
I have no competition. Many first-time entrepreneurs usually misjudge the fierceness of the competition, and assume that their businesses will easily occupy large market shares and quickly generate money. However, competition exists everywhere. As new challengers to established businesses, entrepreneurs should never underestimate their competitors. Investors who hear that you think your business has no competition will see this as a red flag.
A business plan is a necessity if you are looking to raise money from professional investors. It gives you credibility, shows you have a complete strategy and that you have an understanding of all sides of your business. It will also show potential investors when they will get their money back, and the financial opportunity of the investment.