Getting fund for a startup is not easy journey especially in some parts of the world. Not being prepared to send a powerful signal to potential investors (even family investors) that you've mastered your project is a synonym of killing your big idea.
How to well prepare?
Investors have three questions where your answers provided in a fluent manner send them a proof that you have what it will take to make money with your project. It gives confidence to the investors that you can give them a positive return on Investment.
The questions are:
-- Pitch your startup idea?
-- How much money do you need to finance the beginning of the project in 3 to 5 years?
-- How will you make money with this idea (business model)?
In this article, I will talk about the second question I mean how much of money do you need to finance you earlier stage of your startup.
This article is not only important for the entrepreneur but very important for companies too.
With high competition, companies are now developing intrapreneurship. I mean startups are emerging from companies. For instance, HP is primarily computer manufacturer but today is one of the big players in the big data analytic industry, or Galeries La Fayette ( Multibrand of ready to wear (adults & children), luxury beauty product and house decoration items ) now is developing co-working space business across the world. Most of the time these ideas of emerging startups from the company are the ideas of the employees.
Before this idea to be accepted by the board and therefore investing in it, the idea owner must show he/she knows and master what he/she is talking about. And surely the how much money the company needs to invest in the project question will come out. So it's wealthy for the workers to know how to compute how much the startup needs to quick off.
Here is a fictitious company with its financial projections over 5 years
NB: We did not include account details like taxes, depreciation, and amortization...
The green cell is telling us that the company in year 4 has a positive cash flow
- The yellow cell is telling us that the company even broke in year five. It's called Break Even Point
How much money do you need?
In the first year you need 100 to finance your company and therefore you need to rise 100 to finance but you will start with something yourself of course.You will not need to raise entire 100 for the first year. This cumulative profit/loss row will give some gross ideas about how much you need each year to finance your company.
And the big question of how much money do you need is the cell that has the greatest cumulative lost.
In our case, the greatest cumulative lost is in Year 3. So we can say that this company in five years needs 165 to be launched. This amount will help to pay the expenses and start making in Year 5 a profit.
After 5 years the company can start thinking how much the company will need to be scaled up.