Editor’s Note: While there’s no secret formula to success in life, there are a few common elements and attributes from a financial point of view to predict the likelihood of a successful start-up. This presentation, presented by National Bank, focuses on helping start-ups improving your chances of getting the appropriate funding goals for your specific needs and giving you tips to increase your start-up net value.
This is an event recap by Khánh Hà Lê (Ambassador – Student Exec Team), and she’ll walk you through a clear summary of what to keep in mind as you raise money for your startup.
Presenters: Victor Morgado, Jonathan Theriault, and Khouloud Haddaoui
The first important thing is to define your business model. You can do this by answering questions in regards to all sides of your company such as service/product offered, competition, and team. Having a clear business model is a tool you should refer to throughout your strategic planning process because if you are an expert in your field and your business, investors will be more interested in you than someone who just has an interesting idea.
Take customer service for example: If your company is reaching clients by phone, investors will ask what you would do if you cannot reach them. If you are starting a business with no reference, investors will see about the kind of plan you have, your financial model, and your assumptions. To evaluate the value of your company, you should know the value of the current market, or at leasts similar markets. It is common to have a different estimation of your company and market from the investors.
After having a detailed business model, you should start the process of forecasting, to transfer your idea into money. It is always more complicated to forecast with start-ups than with established businesses. To better forecast your business, you need to know the value of your market. Of course, it is good to target the world, but it is better to establish a primary target to aim for and how to reach them. Then, you must know your resources such as your capital, the kind of team you want to build, your potential barriers and how to overcome them. Most importantly, at the end of the day, investors care about at what rate they can get their money back.
This brings us to the topic of growth. Growing fast is a double edge sword because the more money your business makes, the more expenses you will have. Forecasting will be extremely beneficial when you reach this stage of massive growth. Forecasting expenses and spotting potential issues ahead of time is as important as forecasting revenues because there are always expenses you have not thought about. You should also pay attention to your cash flow to make sure you stay afloat with the right amount of equity and debt and have enough cash coming in to manage and pay for expenses and suppliers. As a matter of fact, most of the time, when you borrow money for your business to grow, banks would ask for equity instead of debt and your financial statement.
The basics of financial statements for startups
There are 3 forms of financial statements: notice to reader, review and audit. For start-ups, reader is all you need. This financial statement has three sections: income statement, balance sheet and cash flow statement. The income statement (revenues, expenses, taxes, etc) will give investors a good idea of how well your business is doing. It is coming to operate on deficits in the first few stages as you are growing, and you need the money to grow. The second section, balance sheet, indicates what you have versus what you owe. Ideally, of course, what you have must be more than what you owe. If it is now, you may need to see what can be liquidated to cash within 12 months. Lastly, cashflow statement, the most underestimated part of a financial statement, explains the ins and outs of cash within our operation.
After you have established all points above, let’s look into your options to raise money, capital, available to you. One crucial concept in raising capital is cost of capital, which is the money or the financing the company uses to fund its operations and purchase assets. If you have a sizable asset, bankers will go for a smaller line of credit. If you’re going for loans and buying equipment, they will go for collateral for debt financing.
Early stage companies rarely have sizable assets to present as a collateral for debt financing, so equity financing becomes a viable option. Financing capital also depend on your business’ lifecycle. The first and most popular stage of a business cycle is the valley of death wherein you pitch money in by micro financing, love money, and personal money. After that, in the development stage you start to generate revenues. This is where you can start to find incubators, angels, grants, and subsidies. In the growth stage, bigger funds, provided by bank loans, venture capitalists, are needed to invest in the business operation.
Early stage financing options
The most common instrument to raise money in venture capitalist and angel communities in seed and pre-seed stages are SAFE notes and convertible notes. When you meet with investors, make sure to be be familiar with the lingo – start here.
If you’re not comfortable with venture capital now, you can start off by looking at programs like Futurpreneur, Program Jeunes Promoteurs, PME Montreal, Investissement QC, Fondation Montreal, Crowdfunding, National Bank, Business Development Bank of Canada. The good thing is that all these companies/programs can be combined and you can apply for all those. For a complete list, you can go to National Bank’s directory of resources. If you are a technology company, you should also look up the provincial and federal government for tax credits for scientific research and experimental development costs.
Traps to avoid
Thinking better rates and amortization automatically means a better deal – instead, find a good bank and investors.
Searching for financing when it’s too late or when you’re in trouble: at some points you will have to decline clients because there’s no way for you to keep up with the obligations.
Being under-prepared when meeting with investors and creditors: You have to educate investors on your market, which involves having a deep understanding of it yourself.
Not maintaining personal finances: having a personal good credit score and savings gives you more bargaining power in deals.
Hiding info from investors and creditors: as soon as they find something you’re hiding, trust will be lost