Seed Funding: How Scenario Planning Will Help Your Startup Grow
Posted on 12th April 2017 in The Forecast
Written by Freya Hughes
A fairly common question we get asked is whether we can help very young, startup businesses who have either received seed funding or want to. Making assumptions about something so new can feel uncomfortable, it’s clearly a guesstimate so how can it be relevant? Let’s remember that most start-up businesses fail to become economically viable and an issue is not considering your potential financial outcomes. We’ve put together this blog to prove that, with scenario planning, you can avoid being another statistic.
If you’re unsure about seed funding, we’re going to dissect its meaning and why it could help your business grow. If you’re all over it then skip this and read on about how importance scenario planning is when you raise seed funding.
Seed funding can help you start your business, or if you’ve already secured this entry level cash, we’ll look at the best ways of investing it into your startup.
Money, money, money
A startup is, simply, a business that hasn’t gained any revenue yet. If it’s secured funding, however, it might well have some cash but a lot of outgoings. It’s at this point the business owner needs to be asking themselves key questions such as:
- How are you going to price out your product/services?
- What invoice or payment cycle will you enforce?
- How much does it cost you, the business owner, per unit or service?
- Will you need computer equipment, an office, insurance, etc?
What is seed funding and why is it necessary?
Seed funding is the earliest funding that you may be able to attract into your startup. It’s the capital needed to either start or expand your business. It’s usually a fairly low figure as it’s likely your business will still be in its conceptual phase, and it often obtained in return for an equity stake in the business. Often coming from friends or family, this funding is designed to carry your business through just a couple of months to the next stage of development.
It‘s incredibly important though, as a cash injection that could potentially be the break your startup has been waiting for. Think of it as a stepping stone into becoming a money-making business – with it you can start creating a budget and thinking about where it’ll be best spent. Seasoned entrepreneurs know that with help you can get your idea off the ground. While it might seem daunting at first, seed funding is a key attribute to many business’ success, and you’ve got to start somewhere.
It might not be necessary for you to seek out funding, however. If you’re not looking for rapid growth, but to nurture your business organically, it might be worth waiting before looking for investment. Almost every investor in the world wants a return on their investment (ROI) – sadly few do it just to make an entrepreneurs’ dreams come true. You’ll likely waste your own time, and that of the investor if you’re not completely dedicated to growth.
Managing your funding
So once you’ve started reaching out for funding, how will you know how to invest the cash effectively? FUTRLI’s scenario planning function allows you to input varying outcomes to calculate exactly that. By giving yourself the knowledge of what could happen, you’ll find yourself a lot more capable of coping with what will happen.
Startups grow into small businesses, which in turn grow into medium sized businesses. Scenario planning will help you visualise how you get there. This is the first step into real world business and you’ve got to start somewhere. Monitoring your progress from day one will get you into good habits from the birth of your business. Later down the line it becomes harder to keep tabs on every aspect of your operation, so using reliable software that will help you stick with it is important.
Confidently predict how funding will impact upon your business, calculating how and when you can grow to the next stage. If, for example, you were to crowdfund to get more revenue, you won’t know exactly how much cash will come in from that. Planning for say three different amounts of cash coming in will allow you to make an informed decision as to if you need more marketing to get your name out there, invest further in your service or product, or any other factors.
Input your predicted fixed costs (do some research to make sure your figures stack up) and make that your base scenario. From this, create another scenario and link it to your base assumptions. Do this three over for your best, worst and middle of the road expectations.
There are a few channels you can travel down to secure funding. It’s advisable to invest personal assets in the first instance. Without putting your own cash or assets in the mix, outside investors are less likely to believe in your commitment. Think of asking your nearest and dearest, look to crowdfunding, or seek governmental support, or an angel investor (usually an affluent individual who seeks startups to invest in).
Consider taking a loan rather than asking for investment. Family and friends are likely to want to support you, but less likely to want to be an investor. If you do obtain a loan, you’ll retain majority control over your startup. There is such thing as having too much money. Asking only for what you need will keep you focused as you won’t become complacent with plenty of money to fall back on. And, of course, you’ll owe less further down the line.
David S. Rose’s TED Talk from 2007 remains relevant today. He states that investors are ultimately looking to invest in you. It’s not all about the product or idea. You’ll be the one driving the idea forward so investors will want to know you’ve got integrity, you’re passionate, committed and have the skill and knowledge to pull off your idea. Hold their hand through a pitch – you know what you’re selling but the investors might not – but take care not to patronise them. It’s a fine line to walk down but nail it and you’ll reap the rewards.