Startup Fundraising 101: 4 Challenges in Fundraising and How to Overcome Them

While becoming your own boss by starting a business is an alluring thought for most of us at different stages of life, the reality is it is not that simple. Most startups actually fail during their infancy. One of the top reasons why is not having sufficient funds to continue operations and scale accordingly. This is why having a good service or product is not a guarantee for success; it must be backed with adequate cash.

Having cash means you can hire employees to help you develop initiatives and achieve the objectives of every startup: establish one’s presence, increase market share, improve your product or service and become profitable. While most startups begin executing these plans using their personal wealth, as the business grows, it might not be feasible in the long run unless you have millions or billions of dollars to your name. This is why the fundraising stage becomes inevitable for most startups. 

Startup Fundraising 101

Fundraising is a stage where startups try to convince potential investors, whether a venture capital firm or a high-net-worth angel investor, to invest in their startup in exchange for equity. Such a practice is vital to prolong the business and keep it operational until it gains market dominance or profitability. 

Singapore has long been regarded as one of the most business-friendly regions for startups. After all, startups that have reigned supreme in Southeast Asia, such as Grab and Lazada, originated from the Merlion City. The statistics certainly support this view, with the amount of money raised continuing to increase each year. 

Although Singapore is a fertile ground for startups, there are a few challenges that startups will likely face when it comes to fundraising. In this article, we will discuss the common challenges are and how to overcome them:

1. Ensuring scalability

One of the components that investors will look at when deciding to invest in a new venture is whether it is viable and has enough market demand. Once it does, investors will determine how the business can scale its operations and reach in a cost-efficient way. This means that your startup must show its potential for growth at a minimal cost. 

However, achieving this can be a challenge because the capital needed for startups is enormous at the start to help them achieve the objectives mentioned above. Investors want to see that the business can ultimately have a higher profit margin and lower infrastructure and marketing investment. You can achieve this in several ways, such as outsourcing your back-office needs to a third party. Doing so will minimise your overhead, and you do not need to deal with staff turnover. 

Another option includes utilising software and digitalisation. Yes, you might need to fork out a large amount upfront, but in the long run, it will pay off. 

Additionally, you can transform how your business operates. For example, if you are a jeweller, you can focus on custom pieces based on orders that you market online. Doing so will eliminate costly inventory or the need to pay rent for store space. The profits can instead be allocated to purchasing state-of-the-art manufacturing equipment. 

2. Finding the right amount to ask investors

Since a startup is by definition just starting, they often find it difficult to determine the right amount of investment needed to grow or expand their business. While some may think that the higher the amount raised, the better, this is not necessarily the case. Remember that there will be added pressure as the amount raised increases. Are you ready for it?

Having an executable business plan is crucial to come up with an appropriate figure. It is a detailed plan of how the funds raised will be allocated for the company's betterment, whether hiring employees for product research and development, a marketing push for exposure, or opening a new branch for wider coverage. 

Regardless, these plans should also come with realistic financial forecasts and outcome projections. Work with a professional to find the appropriate figure. Remember that nothing turns off investors more than unfeasible goals, such as gaining market share dominance in a month. Stick with measurable key milestones and achievements that are agreed upon beforehand. 

Read our guide on fundraising consultants.

3. Finding the right investor

Having investors that understand your vision and can assist you in achieving it is essential. With different types of investors available, it all depends on which stage your startup is currently in. As established above, when you first start, you will need to use your personal wealth to get going. Other options include asking your family and friends to contribute. 

Once your business grows, you may start reaching out to high-net-worth individuals as angel investors for additional funds. After you reach certain milestones and want to expand, it is usually where venture capital usually enters the picture. Each type of investor has its own advantages and drawbacks. 

While angel investors are typically not involved in daily operations, their reach is dependent on their personal network only, whereas venture capital may offer a larger sum and more support. They will likely appoint someone to be involved in daily decision-making in your startup. Such help and funding will cause you to give up equity. 

Whatever path you choose, networking is a must to find potential investors. Attending events and seminars on startups or businesses can keep you in the loop. Online platforms such as AngelList or Crunchbase can give you alternatives to extend your reach when finding the right investor for your latest venture. 

Read our comprehensive guide on fundraising for startups in 2022.

4. Spend wisely

Once you get funded, the urge to splurge may creep in. Avoid going on a shopping spree to purchase the latest gadgets or leasing new office space when your old tools still get the job done. Your job is not to impress people by flying in private jets or dining in Michelin-starred restaurants, but to be accountable to your investors. Essentially, hold off on extravagant spending until you bring in more revenue. 

Be frugal when it comes to ongoing expenses. There is an assumption that the higher the price, the better the product. While this may be true, it is not always the case. Frivolous spending can be a sign of poor management, and it may lead to your startup going bankrupt.

For example, a video conferencing platform that can accommodate hundreds of people simultaneously will come with a higher price tag than those that do not. Such a feature may benefit a multinational company that employs hundreds to thousands of employees, but not a startup that employs less than 20 people. In that case, a basic and free Google Meet will do. 

Therefore, please assess your needs and situation before obtaining funding. Afterward, keep track of your expenses to keep your investors in the loop of your spending habits, increasing transparency and trust in the process. 

Fundraising is a significant step that comes with its challenges as explained above. Partnering with a corporate and fund services provider like Lanturn can ensure a seamless fundraising experience.  At Lanturn, we combine great service with great technology to offer end-to-end financial services and solutions for businesses. Lanturn has a proven track record in administering over S$200M in fundraising rounds for our clients, from initial seed rounds to Series C.


Contact Lanturn now.