Fund Raising Pitfalls
When it comes to raising funds, certain times, there are some rookie mistakes that first time entrepreneurs can make, which can hamper their chances of success with funds. Which in turn leads to slow growth, or worse a standstill.
“ It's unfortunate but true: If entrepreneurship is a battle, most casualties stem from friendly fire or self-inflicted wounds.”
-Noam Wasserman, Author
The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup
Self inflicted wounds? Yes. You read that correctly. But why would a startup self-sabotage its own growth?
Well, when it comes to raising funds, certain times, there are some rookie mistakes that first time entrepreneurs can make, which can hamper their chances of success with funds. Which in turn leads to slow growth, or worse a standstill.
Before I begin, a quick disclaimer here: Each startup is unique both in the ideas they present and in the promises they make to their customer. There is no defined step-by-step methodology that works fool proof every time. But, there can be foreseeable mistakes that can be identified and thus worked on.
6 key mistakes that you must avoid while raising funds:
1. Too little, too late:
- When you are unclear on how much to raise, don't ask for less, because of fear of rejection. We live in a volatile ecosystem, and it's crucial to be prepared financially , especially when starting out. Clarity is key here. Ask for the amount supported by your realistic financial projections, business plan and risk profile.
- Another key aspect that entrepreneurs tend to forget is, funding takes time. Even after a Term Sheet is signed, the due diligence and Shareholder agreement is signed, et.al., it could be months before the money is transferred into your bank account. Continue to network with the right investors, even if you don’t need the money right away.
- Be mindful of your burn rate and runway. When the money comes in watch how your critical financial numbers are flowing, because that's what the investors have an eye on as well.
2. Too much, too soon:
Remember the whole fundraise fiasco of a well known entity in a co-working space ? It was burning more money than it could earn to sustain. With an exponential valuation rise with each round of funding, more money was pumped into its model, but without the realistic projections in place to achieve those, it spiraled down its path of failure.
- While a good amount of startup capital will give you the head start you need, too much money in the system can lead to chaos. If you are not able to justify your expenses, or are unable to define long term benefits of the costs incurred, getting the next round of funding would be near impossible.
- Raising too much money too soon, brings with it more scrutiny and reporting to investors.
- Build a scalable model that has higher profit margins and lower infrastructure and marketing spend. Which means to increase your profits, with every penny spent on earning it.
3. Asking too early:
A startup operates in two phases — the build stage and the growth stage. Funds also fuel growth. It's important to know at what stage your business is.
- If your product/ service is still in a very nascent stage, starting funding discussion too early leaves room for speculation.
- If you don't fully understand the market and how your product offering fits into the user’s consumption cycle, you won't be able to utilize the money in an efficient manner.
- Typically growth stage VC firms shy away from investing in only an idea or proof of concept. Why? Because while going through the round of fund raise discussion there will be a sense of hesitation and a disconnect in the valuation of a company.
- Showing up too early can lead to you pitching a dream , and NOT a business.
4. Having No plans for Scaling:
- While a great idea and great team does get you that first foot in the door, what after that? If you don't have a plan of action as to how to grow your business, you’ve already created doubts in the investor's mind.
- This is a crucial step that requires you to build your scaling up strategy based on the following:
- Realistic revenue projections for at least 3 years post funding
- Clarity on how you plan to deploy the funds. Which verticals require funding first and in what order.
- Competitive mapping to know how you plan to position your product in the market
- What is the expected runway you would have post funding
- When do you foresee achieving the breakeven point with your expected sales.
5. Don't Spray and Pray:
- A common mistake entrepreneurs make is to reach to every investor they have heard of. Because with every rejection , it not only affects your morale but might make you question the credibility of your product.
- Do your homework. Know your investors. Study their current portfolio, understand how they identify opportunities, and what stage of business they tend to invest in.
- Find funding in the right places. Know your audience and speak their language. That way, not only are you generating the right kind of noise, but also creating a brand value amongst the right investors.
6. Not seeking professional advice:
- When you're starting out, like every entrepreneur you love your product too much. Which is why it may blind you to the pitfalls that you never saw coming.
- Seek professional advice on key questions such as-
Understanding the legal and compliance requirements of a fund raise is of crucial nature, which many founders have limited knowledge of. Understanding the right valuation (pre- and post- money) in case of multiple rounds of funding requires specialized consult.
- “How much funds do I need?”
- “What type of investment should I seek and with what stake to dilute?”
- “How much should I value my company?”
Conclusion: Funding your startup or business idea is a tough nut to crack. Whether you are approaching a venture capital firm or trying your luck on a crowdfunding site, you will come across multiple hurdles while in search of funds.
If you know where you can falter, you are better prepared to avoid it!