4 Fundamental Mistakes in Fundraising That Startup Founders Can't Afford Trying to prepare for a fundraising round and want to know what critical errors to steer clear of? Well, you've come to the right place – here's a founder's guidebook on what not to do.
- Investors need to clearly understand when they can expect returns from the funds they put into a business.
- When you consider potential investors for a round, you have to make sure to diversify your options.
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The vast majority of startups come up against the issue of conducting a fundraising round at least once in their existence. It is a complex process that requires thorough preparation on multiple levels. In addition to ensuring your products and services are up to snuff, the team members and founders must also be prepared to be examined up close by potential investors.
The inability to raise funds is often cited as one of the primary reasons why about 90% of startups tend to fail. If the founders do not have a proper communication strategy and social capital to reach their investors, the business risks adding to this figure.
As a founder who has led my company through several funding rounds during different market conditions, I decided to highlight a number of mistakes that business leaders often make when preparing for a Series A round. Here are the main points to take note of.
1. Not having your budgeting in order
When you plan to conduct a round, it generally means that you already have a pre-prepared list of potential investors you are communicating with. As a founder, it falls to you to explain to them how much money you need from them, for what purposes, and over what period of time.
Investors need to clearly understand when they can expect returns from the funds they put into a business. Having a detailed picture of how their money is going to be put to use will go a long way in assuring them of your company's stability in the long term.
On the other hand, it would be bad for you to show uncertainty over how much money your project needs for further development. This lends credit to the idea that you do not have a good grasp of financial planning and don't have your fundraising round adequately thought out. Such a stance will not inspire confidence in investors.
If you need $10 million (as an example), then ask for $10 million and give a satisfactory explanation of why it must be so. Provide detailed data and projected growth patterns when possible. If you have previous results to fall on, all the better – by demonstrating evident traction, you can fit within the schedule you set for yourself.
2. Being overly eager or leaning too much on just one investor
When you consider potential investors for a round, you have to make sure to diversify your options. You should never go after just one or two of the most promising candidates while ignoring others. Relying solely on a handful of options can expose your company to unnecessary risks if those parties fail to come through on a deal. On the other hand, approaching a broader spectrum of investors can fortify your financial foundation and improve the chances of securing the funding you need.
Another thing to consider is that you should not be too eager in your negotiations. It risks giving the impression that your business is struggling and the round is something you went for to stay afloat rather than as a plan to ensure further growth.
All your negotiations should be planned and measured. The investors that come to you must be put on a waiting list, with your meetings agreed on in advance over a certain span of time prior to the round. The time your investors spend waiting can be used to show them your data room and give them a chance to familiarize themselves with your business and its metrics.
3. Choosing investors that do not match your product
To get people to invest in your company, you need to be sure that your product is something that they have an interest in and that they can see its potential for growth in the market of your choosing. Past surveys found that a great deal of startups (over 40%) fail because the market doesn't need their product.
This is why it is paramount to have a thorough understanding of your product-market fit and what investors operate in the sector that you chose to involve yourself in. You need to know who your clients are and what value you can offer them.
If you pitch your company to investors randomly, chances are you won't find anyone willing to take part in your round. Take the time to study the known investors in your sector and their portfolios. Determine if you fit with the type of companies they typically invest in, and when you seek them out, emphasize how investing in you could be a good fit for their interests.
4. Not preparing a selling pitch
As I mentioned before, negotiations ultimately fall to company leadership. As the founder, you are responsible for your company's idea and driving it forward. As such, investors will first be interested in talking to you when assessing whether your business is worth putting their money into.
Going into the negotiations half-cocked is liable to result in failure. You must prepare to present your company in a way that emphasizes all of your strong points. Not only that, but you must also take the time to think of any and every uncomfortable question that investors would be likely to ask and plan how to work around them.
It will be a challenge of both hard data and your personal charisma. You need to make investors believe in you and your vision. Only then will they feel confident about entrusting you with their money.
Bottom line: forewarned is forearmed
Preparing for and conducting a fundraising round is always a time-consuming and nerve-wracking task that requires full participation and control from the founders. You have to find the right investors for you, convince them of the sustainability of your business model, and win them over enough to negotiate favorable terms.
Many factors can affect the outcome of negotiations, but avoiding the main outliers we covered in this material would raise your chances of success considerably.