Start up capital is the amount of funding needed by the owners and investors to start a business.
Startup financing has many myths. Whether you are a beginner or a veteran, these myths can be so widespread that it is difficult to figure out what is fact.
We have done some digging into the most pervasive myths surrounding startup capital, and we would like to present our findings.
Myth #1 – Startups need financial projections
Financial projections are not necessary for startups. With startups, financial projections are not indicators of variance from the past, but instead are a promise of something good but are unlikely to happen.
The only real numbers that are actually available are a few year’s worth of cost estimates.
Consider this: most entrepreneurs, when drafting projections for startups, start with Year 5, then work backwards to show figures that build toward the end result, as observed by Seedrs.com.
This is how it is done because there really is no way of creating a more accurate projection for startups.
Myth # 2 – Financial projections help investors on what really matters
Financial projections for startups, in reality, are actually distracting to investors. These numbers are irrelevant for early stage business. When presented with such numbers, investors tend to lose sight of all the other available information and focus on these numbers. Jeff Lynn of Seedrs.com put it best when they said that projections take the investor’s attention away from what really is important when evaluating a startup. Plus, it leads investors to make decisions that can be misleading. This is a sure way to cause “buyer’s regret”, or to put it more accurately, investor’s regret.
Myth # 3 – Financial planning is about predicting the future
They say a company is a failure if it does not meet its projections. On the contrary, financial planning is not about foretelling what is going to happen, but a way for a company to be prepared for its unpredictability.
I would also like to add a couple of other myths regarding raising startup funds:
Myth # 4 – Startup entrepreneurs are obligated to follow investors’ advice
There is really no obligation to follow investors’ advice, but if you are the business owner, you should do well to listen to them. Totally ignoring their advice might not sit well with them, and it might cause your funds to soon dry up.
Myth # 5 – You will need plenty of money to start your business
You do not necessarily have to be swimming in cash to start your business. You can get it off the ground with modest funding from a few investors. It is possible that once you have generated income, you may find out that you do not really need as much money as you first thought.
This article should clear up any confusion about the myths surrounding financial projections when raising startup capital. Are there any myths we missed? Let us know in the comments section below.