The world of economics and business financial analysis is so vast that you can write an infinite number of articles about it. But in this article, we are not trying to analyze businesses or choose the right strategy. Rather, in this article we try to identify common mistakes that businesses make and to avoid them. Most of us have a laid back attitude when it comes to painting a picture about a startup. But that’s only half the truth. The other half of the world of startups is filled with failed and forgotten businesses. Businesses that, despite much effort, risk-taking and time-consuming spending, have finally gone bankrupt or have been dismantled in other ways. So starting a business, which is mainly about providing a basic idea and finding basic financial resources, is the simplest part of any business and it can be argued that many people can handle it. But when you add the condition for the survival of a business, which is moving forward on the path to progress, the situation changes. In this article, we look at the key issues in attracting capital that have led companies to fall or exit the path to success.
Readind this article makes you familiar with the concepts and principles of different startup valuation methods and enables you to choose the best method according to the maturity level of your business and value your startup using Retiba’s practical and free tools.
Table of Contents
Attract too much capital
Capital financing is one of the most important parts of any business. Start-ups, especially in the early years of their lives, need money for their activities and survival because at that stage they still can’t stand on their own two feet financially. Most of us have a laid back attitude when it comes to painting a picture about ourselves. But it’s a big trap that has ruined many future businesses. First of all, attracting more than you need is not ethical. Leaving aside this fact, it must be acknowledged that attracting too much capital multiplies the likelihood of future financial problems.
When you attract a lot of capital, it actually puts a lot of investors in the company, hoping to share in the profits of their business. These investors expect the company to be profitable and progressive, and as a result, they want to be aware of your company’s planning and strategy to achieve this goal. Now, if the capital that is attracted to the company is too much, investors will be very skeptical about its plans and efficiency. In this situation, naturally, it will be your managerial abilities and skills that will be questioned! In addition, it is unreasonable to transfer company shares to people whose money is of particular use to the company. The logical procedure is for the entrepreneur to try to get the most out of the company that has taken on the bulk of its problems.
So the lower your initial capital, the higher your company’s return on investment. It is your art to have the most production or progress with the least possible capital. Don’t forget that the more capital you bring into the company, the higher the expectations and the lower your share of the partnership.
If your startup has crossed Death Valley, and it has had at least 2 funding rounds, you are advised to use DCF method for valuation. Value your startup online with Retiba’s software free of charge.
If your startup has had at least one funding round, you are advised to use Multiples method for valuation.
If you’re already familiar with the valuation debate, you’ve probably heard of astronomical valuations from successful companies such as Facebook, SnapChat, Uber, and so on. Reaching such a stage is the dream of every business owner. The question is, how can a social network or even a simple photo editing app be worth billions of dollars? But our argument here is not to analyze the strategies and strategies of these companies. On the contrary! What we are emphasizing is that you should not involve your mind in these numbers at all, and worst of all, by magnifying and exaggerating the value of the company, you should show the business better than it really is!
At first, the higher value of the company may make you feel proud and successful, but in the long run it will cause a lot of problems for the company. In addition, comparing the value of your business with some emerging companies, especially technology-based startups, is not the right comparison, because in most cases this high value is simply due to predicting the company’s bright future and not the existing reality. So the right way to deal with the astronomical values of start-ups is to not pay too much attention to them and not to measure them.
Our advice in Ratiba is to consider the information and details instead of comparing the final numbers, and to analyze and compare the situation of the companies yourself. This way you can better understand how to get these valuation report figures.
Entrepreneurs who seek help from Ratiba will have the opportunity to take a comprehensive look at their business situation and go beyond a simple comparison of the final figures (such as company valuation). In Retiba, in addition to valuing the company, we also care about other information and details that ultimately lead to the valuation report. For example, we consider the work history of the founder, the city and the country, the field of work, and even the people who work in the company, and finally we try to convey our understanding of the company’s situation to the other side.
That’s why we believe that exaggerated valuation can be a problem for the company. The higher the value of the company, the higher the expectations. In addition, in the second phase of raising capital, current investors will expect the company’s value to increase if it is attracted due to excess capital, which is unlikely to happen and will lead to investor dissatisfaction.
So we must not forget that the purpose of valuing a company is neither advertising nor empowerment! Rather, it will only give you a realistic picture of the company’s position and determine future development opportunities.
Forget the investor’s perspective in attracting capital
When you try to raise capital, you will do your best to make everything look great, clean, perfect, professional and so on. In the meantime, one of the most important aspects of your business is usually missed, which is the story of your business and yourself.
Dealing with the story and the course of events that brought you and your business to this point will be very effective, especially in the early stages of work when you still don’t have much to offer and show. Investors like to know a little about the person or people who run the business, their motivations and goals, and their personal characteristics. Your goals and motivations provide the audience with a picture of the company’s future and help them estimate their potential benefits in your company.
However, the most important principle for attracting capital is to pay attention to the interests of investors and try to ensure the profit from investing in your business. So be sure to clearly state the benefits of investing in your company. It’s important to list the features, technologies, and strategies you’ve used in your business, but it doesn’t have the power to attract investors and persuade them to partner with you. You need to figure out exactly how much it will cost your company. For example, give them a 5-year perspective of the company or state your motivation and goals and the people who work for the company to communicate effectively with them.
It’s a good idea to use a gift-giving strategy when it comes to investing. For example, when you encounter a large number of small investors, give each of them a sample of your product. This will both make them happy and satisfied, as well as increase their percentage of capital attraction and influence on acquaintances. Let’s not forget that despite the advancement of technology and the emergence of social networks, language and person-to-person advertising still has a great impact.
Attracting capital requires marketing and the use of communication channels to find investors. Even when you use a mass investment method, the main step of your work will be to present the company’s work and convince investors to invest in your company. This is somewhat related to the previous discussion. That you should try to convince investors to give you their money and capital. The point to keep in mind here is that you are not the only one trying to attract the money of these people!
There are other companies just like you that are trying to influence these people. This means that the investor has several options, of which you are just one. It is a mistake to think that you can attract investors by simply advertising or explaining the company’s services. You just have to be more discriminating with the help you render toward other people. You need more than luck to succeed in affiliate business.
Attracting capital in the wrong way
Sometimes attracting your capital is done in a way that does not give you the desired result and the company cannot reach the required capital. Forms of work may be the method of choice for raising capital.
At first, it was thought that mass investment was only useful for startups. But now small to medium-sized companies are all using this method to raise capital. However, raising capital requires the right approach. There are several ways to invest in a group, each with its own business purpose. For example, collecting public donations for social services through social media platforms will be easier than borrowing-based collective investment.
Experienced entrepreneurs may prefer to turn to angel investors (investors who usually meet the financial needs of startups for a portion of the company’s stock). However, this will naturally be at the expense of part of the company, and less experienced entrepreneurs will have to consider this in equations.
So when raising capital, you need to consider the different options and the scenarios that may occur with the selection of each of them. Examining all aspects, and especially considering the activities of competing companies, greatly complicates the decision-making and selection of the right strategy for attracting capital. For this reason, it is recommended that you seek the help of experienced experts who have previously analyzed many companies and contributed to the strategy of startups at different stages. Retiba helps you make more informed decisions about your business and determine its fate. At Retiba, we are well aware of the difficulties and complexities of raising capital and are aware of its various aspects. If you, like many other entrepreneurs, face the challenge of raising capital, you can count on our help.
If your startup is at pre-seed and seed funding rounds, you are advised to use the Score Cards Method, Risk Factors Summation method to value your startup.