Getting financing for your start up

Three enthusiastic persons in their early twenties had good ideas for their start up only to falter due to insufficient funds. They felt that they had done their homework, did some rough calculations and envisaged that their business idea would be workable. They anticipated that in 2 years time, they would breakeven, and start making serious profits from the third year onwards. What was required was a sum of about $350,000 to start up their business venture.

They approached their parents, relatives, friends, financial institutions and angel investors for loans or investments. During these sessions, they were asked many questions which they had difficulties in replying. The common thread they heard was that they lacked a viable business plan. As a result they failed to attract investments and were also unable to obtain a loan.

Essentially a business plan gives the reader a roadmap for your start up. The key contents of a business plan are as follows:

1. Introduction

Under introduction, you should give an explanation of what the start up idea is about in a nutshell. Clearly specify the product that your start up intends to offer and why you believe this will be a success. Explain what the team hopes to achieve in 3 to 5 years time. At this point, it would be useful to give a rough estimate of the costs involved and the amount of investment or financing sought.

2.Industry

Elaborate on the industry which best describes the business the start up is in. If the start up idea is to disrupt a particular industry, at the end of the day, it would still be considered as operating in that industry. Hence there is a need to give an idea of how the industry operates and who the major players are. In addition, there is a need to state who you perceive to be your major competitors. Explain where your major supplies come from and spell out the possibilities of disruption.

3. Market Segment and Market Positioning

Indicate the reasons why you segment the market in a certain way be it by geographic, demographics, psychographic or behavioral. An example of demographic segmentation would be by income levels, age, gender, etc. Psychographic segmentation relates to lifestyles, values or socio-economic classes. Behavioral segmentation uses factors like usage rates, benefits sought, brand loyalty and so on. Under market positioning, state whether you are pricing your product at premium rates with similar levels of service or at budget rates with little or no service offered or somewhere in between.

4. Core Competencies and SWOT Analysis

SWOT stands for Strengths, Weaknesses, Opportunities and Threats. Explain the core competencies your team brings to the table as part of your strengths in the SWOT analysis. You have to be frank about the weaknesses of your team. Opportunities relate to the areas in which your product or  service intends to take advantage of. Finally, under threats, spell out what barriers that new entrants face in entering your market or your competitors giving you a fierce fight to retain market share. At the same time, mention why your products beat competitors already in your market.

5. Customers and Income Sources

Explain the type of customers from your targeted market segment where your start up expects to earn most of its income from. This could be from the main products offered. It could be supplemented by income from supporting products. As an example, the main product of this website is an app for start ups. The supporting product could be providing training programs for would be entrepreneurs to go through the process of evaluating their business ideas. This would be possible given the complexity of the entire process. Other income sources could come from advertisements, memberships, subscriptions and obtaining sponsorships.

6. Costs

Start with capital costs like machinery and equipment and depreciate them accordingly to the period of their useful life. Then include any non-tangible assets and  amortize them over the period of their useful life as well. Next, you need to indicate the size and type of premises that your start up would occupy for its business. Give an estimate for the rent for the premises. If you need to renovate the premises for the business, depreciate the cost according to the period of useful life. Your start up has to employ people to operate. Give each of your team members including yourself a meaningful salary. If your start up needs to employ additional staff, include them accordingly. Under expenses, include all significant purchases that are needed to keep the business running. For the moment, exclude the direct cost of goods or services purchased for the sale or resale of your products.

7. Project revenue

In order to project the revenue, you need to simplify the product categories to a maximum of 10. For each product category, you have to reveal the gross margins and hence the cost of goods sold. Then project the numbers for each product category you expect to sell on an average month in year 3 of your operations. You need to use a spreadsheet or an App like StartBizUp to help you do the financial projects. Just take note that revenue, costs and profits and not the same as cash. Expenditures which are depreciated or amortized are paid in total cash upfront (as cash out) on the month of purchase but come up as monthly cost based on the depreciated or amortized amount. The monthly cost based on the depreciated or amortized amount does not result in any cash out. At the end of the day, you need to show that the startup would be cash positive months before the end of year 3.     

8. Sources of Funds

Let us assume that your start up is cash positive months before the end of year 3. From your spreadsheet or the StartBizUp App, there would be a point where the cash flow is most negative. This most negative amount plus a margin of say 10% – 20% would be the required capital needed for the start up. You need to show the sources of funding already amassed for the start up. This could be funds from yourself or your family or anyone who believed in your venture. Thus explaining the shortfall needed for your start up to launch would be more convincing.

Bind the Business Plan Report to make it look professional. Prepare as Powerpoint presentation to give to any potential investor or financial institution if you seek a loan.  Good Luck.

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