At the beginning of any business capitalization decision, there are three questions central to this endeavor. First, what kind of sources of capital exist for my business. Your small business is you. So, ask who can invest in me.
Second, what are current and future capital requirements of my business?
Thirdly, how will you allocate the resources?
If you have not adequately answered these questions, then your capitalization journey is about to encounter bumps.
In this article, we will share how to go about the capitalization process the way 10% of the businesses that succeed do.
1. Be realistic not just optimistic
You will never find a more hopeful population than a congregation of business startup entrepreneurs. They are always upbeat and often to the detriment of their ventures. It is good to be positive about your business, but also imperative to be realistic about your business finance.
The first step is to have a comprehensive business plan complete with a very detailed SWOT analysis. Armed with such a plan, there is no room for surprises. Otherwise, you are likely to encounter fatal roadblocks that you never anticipated and crash out. About 90% of small businesses fall at this first hurdle.
When it comes to capital, be thorough, exhaust all your “ifs” and look at how they would affect your overall business model.
2. Get the budget balance right
Businesses are different, and they are different for a reason. Don’t just pick another business’s budget model and adopt it. Doing that is foolhardy. In the SaaS sector, enterprises allocate from 25-75% of their revenues on marketing. Can a manufacturing business do the same? Not really because about 50% of the revenues go to product development and manufacturing.
If you can get it right, first time, you minimize the risk of failing and increase your potential to use your capital optimally.
3. Be thorough about your capital sources
Often, venture capitalists can bulldoze you into accepting to cede considerable equity. Evaluate the overall contribution that the venture capitalist brings to the table, safe from money. If it is about money, you can always get capital from small business lenders such as Capital Alliance.
If you have capital investments from savings or other sources, you can decide not to use it. Why? If it is your money, you tend to use it without being frugal about it. However, when you know someone is expecting his or her money back, you tend to look for value before even investing.
4. Proper valuation
Some companies have crashed out of the equity market just because they raised funds with a crazy assessment in the first round. Be realistic about your valuation. In the beginning, you may take a 10% increase in your valuation if you feel so. However, ask yourself if you may need further funding soon. If you do, refrain from such a move.
While it is always tempting, it can put off every other potential capitalist out there. According to Narin Charan, a small business capitalization expert, small businesses must balance their valuation so that other potential partners can share growth.
5. Look out for win-win engagements
Some people are so into capital that they forget that in the process of generating capital, you can strike beneficial alliances. A good example is crowdfunding. Some businesses break even before they even make the intended product. This is because they already have guaranteed orders that will propel them there.
Also, some partnerships with major distribution chains can shield you from any market forces. For example, some film documentary producers do not require capital because they are already capitalized by major distribution behemoths such as National Geographic. Look out for such capital partners.
On the overall, be smart about your capitalization journey.