A start-up’s fundraising is a time-consuming procedure. The system might fail at any point along the process, causing the corporation to lose out on a considerable amount of money. A step-by-step process for establishing a start-up fundraising strategy does not exist. Each business is distinct, both in terms of the concepts it presents and the promises it makes to clients.
Reality check:
Most businesses aren’t a suitable match for angel or venture capital funding. For such investors, only firms with the potential for tremendous development and a clear exit make financial sense. Even the most successful enterprises in industries such as construction, plumbing, retail, and restaurants would not be eligible since they do not meet those criteria.
In fundraising, however, it is not the consumers’ feedback that is most important. What matters is how prospective investors perceive the firm. The capacity of a company to make itself and its business concepts appealing is critical to its funding attempts.
Many entrepreneurs begin by self-funding. Because of this dependency, entrepreneurs are often under intense pressure to find an investor as quickly as feasible. Obtaining funds might become a full-fledged passion.
However, errors might be made in the drive to attract investment. It’s all too simple to cut corners on research, make mistakes with timing, and leave a negative impression. So, let’s have a look at some of the most common errors startups make when attempting to raise money and how to avoid them.
1. Ignoring the advice of a professional
We endeavor to conquer whatever challenge that comes our way on our own as businesses. While the will to conquer is part of what makes entrepreneurs successful, it can also be a flaw. It’s crucial to get expert help while seeking cash for your business to better understand your financial needs and expectations. “How much do I need?” and “How much will it cost me?” are the two most important questions in every fundraising endeavor. An accountant with real-world valuation knowledge can assist you in determining these answers so you don’t spend time and money on bad judgments later on.
2. Insufficient research
In the haste to attract investment, it’s easy to overlook the need of doing enough desk work. This indicates you don’t know enough about your company and market, and even more significantly, you don’t know enough about your investors. It’s easy to get enticed by venture capitalists with impressive portfolios, but you must consider if they are the greatest fit for your company. The only way to find out is to do study.
Make sure your research is correct: Begin by asking yourself some broad questions, from which you may go to more sophisticated ones. The ultimate objective should be to create a business strategy. Consider the following:
• Your motivations – Why are you looking for money?
• Your point of view – What do you want to achieve in the long run? How quickly would you wish to expand your company or recruit new employees?
• Product marketability – Is the product marketable? What is the size of the market?
• Your backers – What are their names? What exactly are they on the lookout for?\
3. Uncertainty about how you’ll spend the money
Knowing how you want to spend your money is an important component of any business strategy. It’s also commonly overlooked when individuals strive to show the worth of their product or its market position. Few investors are willing to send you money without first having a thorough conversation about how you intend to spend it.
Investing preparation: What you tell them is determined by your company’s priorities. However, you must demonstrate how you intend to spend the money wisely and efficiently. Here are a few crucial points to think about:
• Recruit the proper people – Investors typically invest in the team rather than the company concept, so understanding who you’re going to hire is crucial.
• Take the product to the next level – If your product is still a prototype, it may be time to test it and scale it up.
• Market the product – Could you afford to invest the money to make it more appealing to your target market?
• Increasing sales – Investors value Return On Investment (ROI), so set aside some funds to boost your sales.
4. Only Considering Equity
Just because you can receive angel or venture capital funding doesn’t imply you should. Other sources of expansion funding do not need the sale of a portion of your company.
You might start by looking for government or other organization funding. This option is generally used by businesses that benefit the public. Many subsidies support medical and green-tech businesses, but practically any business might benefit from them. Grants have the benefit of not transferring ownership and not requiring repayment. On the negative, they often have conditions for how you utilize the funds as well as licensing to any intellectual property you create.
Second, you may use partnerships to fund the development of your product. If a larger organization needs to use the solution you’re developing, they could be willing to pay you to provide it. They may demand exclusivity, discounts, or other non-equity remuneration in exchange. These partner financiers often turn into major clients or even acquirers in the future.
Third, you may be able to meet your financial demands using loans, especially in the near term. Some people and organizations may lend you money to help you fund your product’s creation or cover expenditures while you wait for clients to pay their invoices. For startups with a lot of traction, venture debt is another way to get money. It usually necessitates providing warrants to the lender, although it involves far less equity than a traditional investment.
Fourth, you might choose to bootstrap your company instead of funding. If you can rapidly produce money, you may be able to leverage that into the expansion you need. This is only feasible if the competitive situation does not call for rapid expansion.
Most businesses, if not all, perform some or all of these things at some time.
5. Raising Money Too Soon
The North Bay Angels receive a great number of applications from businesses that are not ready for angel financing. Unfortunately, you only get one bite of that apple most of the time. When you’re pre-fundraising networking, ask investors whether they believe you’re ready. What criteria or KPIs must you meet before you can apply?
Because they have not done the essential validation work to decrease investment risk, most startups are “too early.” We all know that investing in early-stage startups is dangerous, yet taking needless risks is not an option. Before you apply, make sure you’ve looked into all of your business model’s major assumptions. Is your unit economics scaleable? Will your consumers’ behavior alter as a result of your solution? Is it possible to gain consumers at a low cost-per-acquisition (CAC)? The ideal method to verify most of them is through traction, but if you can’t acquire that without money, look for alternative ways to collect data or undertake trials. Then, before you apply, obtain confirmation from someone else that you’re ready. It’s simple to trust what you’re saying.
6. Communication Issues
In an ideal world, investors would evaluate your business entirely on the basis of the quality of your concept, strategy, and execution. Regrettably, we do not live in such a world. Investors are unlikely to get beyond an unappealing exterior to the gold underneath.
Your messages must be precise and concise in every way. Fundraising is a very competitive industry. There are a lot of entrepreneurs vying for a limited amount of capital. Even in writing, your excitement and vitality must come through in every contact. Be obviously enthusiastic about your company. Why should anybody else be enthusiastic about the business possibility if you are not? You don’t want to go overboard, but you’ll probably need to be a little more lively than normal. That would be a lot livelier than you normally are if you are an introverted engineer.
Use tales and narratives to deliver information wherever feasible. Facts are less compelling than stories. Humans are considerably better at understanding and remembering tales than data points. Steve Jobs was an expert at it. He might have spoken on the MacBook Air’s size at the launch event, but instead he detailed how it fit in an envelope. That example was mentioned in every story on the incident. It had such an impression on me that I’m still talking about it after all these years.
Aesthetics is important. You, your deck, your handouts, and your website must all seem professional. Our perception of everything else is tainted by a messy deck or bad personal hygiene. Should I trust you to handle the complexity of a fledgling firm if you can’t even develop something as basic as a visually appealing PowerPoint deck? When you seem to have complete control over the “small things,” on the other hand, it implies that you know how to produce high-quality products. Although this is not a deliberate response, it may taint the investors’ overall impression of your business.
Finally, you must develop your public speaking skills. Hundreds of times, both alone and with a critical audience, practice your pitch. Record a video of your pitches if you can bear it so you can study every cringe-worthy blunder. You can’t seem carefree until you’ve put forth the effort. Furthermore, unless you know the presentation well enough to give while focused on other things, it is difficult to adjust on the fly to your audience’s emotions, queries, and interruptions.
7. Obtaining Too Much or Insufficient Funding
Raising too much or too little money is a common financing blunder.
You won’t be able to pay for the resources that will enable your company to flourish if you raise too little money, and it will be difficult to acquire and keep good staff.
A business has expenditures every day, so if you haven’t raised enough money or your firm isn’t producing enough yet, you’ll run out of cash and have no alternative but to pack your belongings and go.
On the other side, raising too much money might be hazardous. Founders will also be subjected to increased investor pressure. When a large sum of money is given to you by an investor, it is expected that the money would be put to use straight away rather than languishing in a bank account while the founders take their time.
To prevent these blunders, ask for a bit more than you think you’ll need, but not too much, so you’ll have a cushion in case of emergencies, unforeseen delays, or charges. Be realistic about the amount of money you’ll need and strive for just a little bit more.
8. Failure to seek feedback
The harsh fact is that you’re not going to receive the money straight immediately. You will almost certainly have to cope with rejection at some time. This is an important aspect of being an entrepreneur, as well as a key component of many of the most well-known startup success stories. However, by asking for constructive input, you may convert that negative into a good.
Obtaining feedback Consider what went wrong after you got the ‘Thank you for your time but regrettably…’ email. Then send a follow-up email asking if they have any comments on your pitch, product, or team. Is what they’re saying consistent with what you’ve been thinking? It often does not, and this is an important lesson to remember for the future.
Summary
Fundraising is a time-consuming and difficult task. Even if you do everything correctly, your chances of getting an angel or venture capitalist to invest in your firm remain slim. However, if you make these unforced mistakes, your chances of winning swiftly dwindle. As an entrepreneur, you are taking a significant risk. Make sure you’re giving yourself the greatest opportunity of succeeding.