When you’ve decided to take the first step towards running your own business, you need to start by creating your business plan and winning financial backing.
Crafting your business plan
The business plan is the essential first step that will convince investors you have an idea worth supporting by showing evidence of real demand. “You have to prove first that there is an opportunity and the proof will come from the field, from interviews with potential customers,” says Frédéric Iselin, HEC Paris affiliate professor in entrepreneurship and innovation. “The need has to be intense and shared among a lot of people.” Companies like Apple which develop new products in strict secrecy have helped to fuel a belief that the most innovative ideas cannot be tested by market research. Professor Iselin believes that is a mistake.
“It’s a strong belief in the start-up community but it’s absolutely wrong,” he says. “Being realistic is a matter of facts and figures coming from the field. If you have done market research, field interviews, expert interviews, and you have a big sample with good methodology, then we will trust you. But if everything just comes out of your brain, no one will trust you.”
“You have to prove first that there is an opportunity and the proof will come from the field, from interviews with potential customers.” ~FRÉDÉRIC ISELIN, AFFILIATE PROFESSOR IN ENTREPRENEURSHIP AND INNOVATION AT HEC PARIS
The next stage is to present the pitch to investors, although technology has opened up a new option of crowdfunding through sites such as Kickstarter. However, successful crowdfunders usually have some larger backers to kickstart their Kickstarter³. Most founders start with money from people they know – “the three Fs, friends, family and fools,” jokes Professor Iselin. After that, they will often seek finance from business angels, investors who take a risk on projects in their infancy. The average angel investor receives 8 percent of the equity for an investment of about £42,000, according to research in the UK⁴. If a business continues to hit the milestones agreed between investors, it’s likely to seek funding from Venture Capital investors (VCs). With the promise of far higher investment come more professional processes and a new shareholder agreement dividing up ownership of your company. “If you want to play the game, you have to use their rules, or you don’t get the money,” says Professor Iselin.
“Entrepreneurs should realise that simply raising cash isn’t everything. They need to ensure that investors share their long-term goals and strategy as well.” ~ETIENNE KRIEGER, AFFILIATE PROFESSOR & SCIENTIFIC DIRECTOR OF THE ENTREPRENEURSHIP CENTRE AT HEC PARIS
For this reason, Professor Krieger says entrepreneurs should realise that simply raising cash isn’t everything. They need to ensure that investors share their long-term goals and strategy as well. “Do not try to maximize your valuation without looking at other key issues,” he says. It is just as important to build consensus between shareholders, find investors with strong reputations and make use of VCs’ networking skills. Similarly, he warns entrepreneurs not to consider their job complete when they win a big funding round, just because their company now has a big nominal valuation. That’s only “virtual wealth” until the founders and investors can cash out with an IPO or get acquired by a bigger player. “Do not compare yourself with Mr. Gates once you succeed in securing an important financing stage: the hard work is still ahead!” says Professor Krieger.
³ Source: Vulkan, N., Astebro, T.B. and Fernandez Sierra, M., 2015. Equity crowdfunding: A new phenomena. Saïd Business School WP, 21. ⁴ Source: Wiltbank, R.E., 2009. Siding with the Angels: Business Angel investing-promising outcomes and effective strategies. NESTA.