You have a great business idea and when you put it to the test it’s a success, but you’re not sure if you have the resources to get it properly up and running – so what do you do?
First things first, take a step back and consider how much you actually need. It’s a common misconception - and one that can inevitably become a trap down the track - that at the early stage, start-ups need large amounts of capital to grow.
Founders are surprised when I tell them they should be frugal at this stage of development, seeking funding in the thousands, not millions. I’d recommend that start-ups layout and understand their minimum cost requirements before seeking any external investment as this will benefit you in the long run.
One of the top concerns I hear from many start-ups is that they know they need support but accessing it is out of their price range. This is why BDO takes a unique and cost-competitive approach for founders in the seed stage. We drill down into the key areas that drive your growth as well as helping you to access government grants and connecting you with our industry partners.
Key Characteristics of the Seed Stage:
- Valley of death
- Pre-revenue cash burn
- Valuation is at its lowest
- Family, friends, and fools
- Dilution is at its highest
- High-risk investment
- Back the person not business
- Investment in thousands (not millions)
- Angel investors.
Key things to keep in mind during this stage:
- Focus on fine-tuning the business concept
Investors are looking for two critical things: a great concept and a great founder. As investing in a start-up is high risk, potential investors want to see that the business idea is unique, scalable in the real world and is led by an innovative and charismatic founder who can drive it to success. At this stage, you should be proving concepts and developing your Intellectual Property (IP). This will increase your valuation and help in the next round of funding – it’s critical you capitalise on your intangible assets.
- Balancing your capital investment needs against ownership dilution
In the early stages when risk is high, business valuation tends to be at its lowest. As larger capital investments often come in exchange for a larger piece of the pie, this means you could be giving away much more of your business’s ownership and potential value than you’d expect.
When considering a seed capital investment, ask yourself:
- Ensuring the structure is right from day one
- What activities do you specifically need the investment for?
- What is the minimum amount you require?
- What other market opportunities are available?
- How much equity in your business are you willing to give up in exchange for funding?
- What grants and incentives are available?
Having the right structures, governance frameworks and processes set up from the beginning can save your start-up significantly in the long run. For example, a start-up with the incorrect tax structures for its growth trajectory can be faced with sudden and unforeseen tax liabilities later down the track.
Some questions you could ask yourself are:
- Are my systems and processes scalable?
- What is my exit plan? Do I want to list or sell my business?
- If my business is to grow rapidly, do I have the skills, experience, and structures to support and run a much larger company?
- As the business grows, am I prepared for the new reporting obligations?
- Should I start the audit process early on?
- What type of governance framework do I need?