Why you won't get Finance...
You have a business idea.
You think its great, hell, its even better than great…its amazing! Once you get this moving there is going to be serious money in it for everyone involved!
You prepare a business plan to raise money.
The plan contains arbitrary five year projections of a market that at this point doesn’t yet exist. You are planning to build a product/service that you have no technical ability to deliver on, and you lack even the basic business development experience necessary to bring it to market.
To add insult to injury, you're not even ready to front money for your own idea, but are quite happy to proclaim +1000% expected returns to the investors you want to get money from.
Reality check. No one is going to just give you money.
Unsurprisingly, no one gives you the money. You're left frustrated, thinking that it's unfair and that if only you could get the funding then you could make this happen.
While this analogy is rather extreme, unfortunately, we see a version of this story all the time. Too often people think that all they need is a business plan, and then the next step in the process will be investment. The reality, unless you have capital that you are willing to put into the business, or offer as collateral, banks and investors are not going to care about your untested idea.
An untested idea isn't worth much.
At this point your idea is only at the concept stage. In an industry where most well-funded, talent heavy start-ups still fail, your project is just too much of a high risk bet.
So what do you need to do instead?
For any type of investment, the best way to sell it is with real demonstrable results. For a start-up that means:
- A product/service that has a validated customer and is either earning money, has a plausible future revenue strategy or would be valuable to another company to obtain;
- Favorable growth metrics and evidence that you are positioned to manage this growth; and,
- Evidence of a market either large enough or profitable enough to outweigh the risks associated with the venture.
To get that information requires you to apply 'Lean Methodology' principles while either bootstrapping with your own funds or seeking external support from start-up incubators, accelerators etc. You need to implement a feasibility study, create a business model, develop a minimum viable product, and from this get the aforementioned proof.
Once you have the evidence that you are a good bet, than you will be in a position, to either seek investment or alternatively you might not even need it.
Still not convinced?
If you are still not 100% convinced then we recommend you look to real life examples. Even Facebook and Google had to demonstrate their potential before getting funding. Google was running for almost two years across Stanford before its first external investment, and Facebook was running for more than a year, with tens of thousands of users, before the same. These were some of those hottest start-ups in the digital age, and they still needed time to prove their market potential!
You don’t think it applies to you?
You might be thinking that this article doesn’t apply to your business as you are not following a start-up model and bank finance is not the same as investment. Maybe you’re starting a new cafe, plumbing business, or IT consulting firm that fits a more traditional business model.
Unfortunately, the same rules apply.
You are still going to need evidence of your viability, it will just be slightly different proof. A bank is going to need evidence that you will be able to pay of your loan. This might mean heaving other sources of income in the early stages of the business, providing documentary evidence you can manage your budget, or proving you can control costs by significant reducing your living expenses.
You could also apply lean methods by running your business at a small scale first, to provide customer validation and income potential. This could be done while you hold full time work and acts a test model before you leap in.
Have demonstrable results.
If you have an idea, use Lean Methodology and get proof that you are worth investing in. Once you can show that you have real potential, investors will be throwing money at you!