By Paul Jackson, founder of Worthworm
For new or young entrepreneurs, understanding the realities of the startup world often comes as a shock. Long-term success requires more than just a great idea and there is no secret formula for navigating such a competitive landscape. Numerous startups are born every day, but the amount of funding largely remains unchanged and making it nearly impossible for all of them to succeed. Some entrepreneurs will choose to bootstrap their venture the best they can, while others will turn to trendier options such as crowd funding or a startup accelerator to get off the ground.
However, many more will choose to seek funding from investors as a way to sustain growth. For those of you taking that route, my advice is to avoid the temptation of initially overvaluing your venture and only seek what you truly need:
1. Success is more than just a great idea.
The startup game is a tricky one – many innovative ideas fail to take off every day while less impressive ideas cling to survival. Consider headline making app Yo, which has garnered significant media attention and raised $1 million in funding recently. It’s not the most game changing of ideas, sending hello via the word ‘Yo’ to your contacts, but it has clearly sparked the interest of a particular market and group of investors. It probably seems like an overnight success to new and young entrepreneurs. However, there are definitely some challenges that Yo and its leaders will have to overcome in the next few months in order avoid being labeled a one hit wonder, including how to best invest that $1 million. The startup scene is not short on fun ideas like Yo, but without the ability to justify the amount of money you are seeking and how it will be used to grow your company most investors are going to decline to open their wallets.
2. Rigorous financial predictions are critical.
If a simple app like Yo can secure a million dollars so quickly, it’s easy to see why entrepreneurs might be tempted to overvalue their own venture in an effort to compete. However, doing so can be a risky move that often turns an investor off from the very start. First, you run the risk of appearing inexperienced or unreasonable. Investors are not going to open up their wallets for a startup team that hasn’t done their homework and is unable to demonstrate how they determined the worth of their company. Additionally, if an investor does accept an overblown prediction this typically leads to incompatible relations down the line. For example, scoring a significant first round of funding makes it much more difficult to continue increasing the amount raised in subsequent rounds. If you are unable to continually justify the value of your company, eventually investors will take notice and decline to invest.
3. Learn from other successful companies.
Many companies have been making billion dollar headlines in the past few years so it makes sense that young and new entrepreneurs should look back and learn from them as examples. When doing so, you will quickly realize many did not begin with standout rounds of investment in the millions of dollars. For example, home sharing service AirBnB was recently valued at around $2.5 billion. Looking back to its origins you find it began with just $20,000 in seed money. This is indicative of a company that knew how to scale its business appropriately and meet a need in the marketplace. Skype is another great example of a company that began with just $250,000 in angel investment and when on to steadily grow until it was acquired by Microsoft. Having the strategic know-how to raise the funds you need and using it in the right places is what separates the successful companies from those that sizzle out.
There is a lot for new and young entrepreneurs to learn once they decide to take on startup life full time. The most critical factor in their success will be the ability to make rigorous financial predictions and demonstrate how they plan to use the investment they are seeking to enter a very crowded marketplace. After all, an investor’s ultimate goal is to secure a return on investment and you need to show them how you are going to get them there.
Paul Jackson is an entrepreneur, angel investor, and aerospace engineer. His engineering expertise and entrepreneurial spirit are driving forces behind his founding of Integrus Capital, and co-founding its flagship offerings, Worthworm and D-Strut LLC.