Small Business Funding, How to fund a startup, Due Diligence (III)

Each and every Startup must conduct the Due Diligence phase before meeting VCs  for Venture Funding.  This stage primarily evaluates the viability of the business concept for the investor or an entrepreneur. This largely overlooked, or at the very least underrated task is of utmost importance in the lifecycle of a deal. Before we go investing often-scarce resources on a venture, we must make sure that it can achieve a sustainable competitive advantage in the marketplace. Most entrepreneurs would like to get to market before the competition and so in their haste make a tactical mistake of sacrificing due diligence. It’s that run fast or die mentality again. The reality is that one must not only get to market as expeditiously as possible but also allocate sufficient time to researching the business issues. Otherwise failure is eminent. That having been said, the process of due diligence, which involves a great deal of probing and the asking of thought provoking questions, comprises of the following nine steps:

7. Business economics and financials

 Investors are always looking for 5-year financial projections.  This will enable them to see the revenue growth, predict cash flow requirements and questions the assumptions in the model.  The entrepreneur must take this exercise seriously since the economic viability of the idea is tested here. It is advisable to hire an experienced accountant. One must build a comprehensive model of your business here; a virtual experiment. Any business model must include a detailed cost-revenue structure detailing all assumptions. Revenue, costs of selling, general, administration and marketing.  Double-check your figures! Remember that this may take a while, but you have to do it before meeting with the investors.

8. Funding needs.

Okay, now that you have your business model in place, you should have some idea of how much funding you’ll need. Traditionally, a financial analysis will allow you to validate the business and economic model.  By listing the startup’s key initiatives and objectives for the short and longer term, the entrepreneur can estimate the capital needs.  Armed with the Financial Analysis, the entrepreneur can determine the amount of money required to fund the operation and successfully execute the idea. You’ll probably want to sit down with your business strategist, along with some industry colleagues of yours and prepare a time-line comprising of funding and spending phases for your business. Think of it in terms of six to nine months of spending, then raising additional capital. These stages will be elaborated upon in the Funding chapters.

9. Exit Strategy

A comprehensive business plan must contain a section on an exit strategy for the startup.  This strategy must be well thought out and incorporated into the business model.  An exit strategy enables the entrepreneur to envision where they would like to take the startup.  Depending upon the business mission the exit strategy for a startup may range from achieving revenue targets to capturing a segment of the market or even being acquired by a competitor.  Most startups plan to expand operations and sustain a competitive edge by raising additional capital in the form of an Initial Public Offering (IPO).

Even though it is extremely hard for an entrepreneur to hand over the reigns of the organization to another, one must plan to take the idea to the next level and step away gracefully.  Keep in mind that you probably don’t want to see your idea stagnate by getting stuck with it in a static revenue loop. Another difficult issue, which goes back to Organizational Structure, is the determining of your own level of competency. Remember, you want to do what’s best for your startup, so when should you hand over the reigns to someone more qualified?

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2 Comments on “Small Business Funding, How to fund a startup, Due Diligence (III)”

  1. […] Small Business Funding, How to fund a startup, Due Diligence (III) […]

  2. We that on, thank you writing this, this precisely what has been for you to find!

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