Costly Mistakes when Raising Funds
1) Asking for money
There’s an old investing adage: “If you want money, ask for advice. If you want advice, ask for money.” Many founders make the mistake of starting conversations with investors too late. They start pitching when they really need the money, but they should have been building relationships earlier. At best, this can make you look desperate or unprepared. At worst, investors might demand exorbitant terms if they think your options are limited.
2) Not doing your homework
Any prospective investor has likely invested in startups before. And that investor likely didn’t invest randomly — they chose investments with a particular theme or common thread. Their investment behavior likely focuses on select industries, stage of company, or something similar. It’s not a good idea to send a pitch deck for your pre-revenue fintech startup to a venture capital firm focused on growth-stage life science companies. While this might seem obvious, founders frequently make this unforced error.
3) Asking for too little
Founders want to conserve their capital, time, and equity. They realize that being frugal can serve them well in many ways. I’m a huge proponent of only asking for the resources you need. But hoping to retain as much ownership as possible, founders often ask for less money than they should, assuming the financial needs of the business are smaller than they really are. Asking for too little can hurt in many ways.
First, this may signal to investors that you don’t fully understand your company or your market. Second, if you are a company that will need to raise money numerous times, asking for too little means you many find yourself constantly fundraising — and not as focused on building the business. Finally, and most important, if you don’t raise enough capital and find trouble raising more, you could put your venture in dire financial straits.
4) Pitching to the test
You’ve likely heard the term “teaching to the test” — preparing students for a standardized exam by focusing on a narrow set of questions presented in a specific way. While this approach can improve near term scores on a test, it robs students of a broader opportunity to learn.
I call the fundraising equivalent “pitching to the test” — contriving a pitch to tell investors exactly what they want to hear. Founders typically do this by describing a market that’s larger than their realistic audience, making an investor’s potential return appear bigger. This might work to turn a first investor meeting into a second, but eventually the tactic falls apart. Either investors see through such “ambitious” numbers, or you find yourself unable to deliver on the promises you made. Both scenarios end badly.
5) Taking your network for granted
When it’s time to raise money, your personal network is probably your most valuable asset. Warm introductions from your connections will open doors far easier than any cold email could. Even though fundraising can be stressful, lengthy, and challenging, do not take your network for granted. As tiring as the process may be, appreciate your champions for the opportunities they create and the introductions they make. When you pay their kindness forward in the entrepreneurial community and beyond, you create a long-lasting asset. When you fail to do so, you’ll see your introductions run dry.
6) Assuming interest equals traction
When an investor asks about “traction,” they’re looking for evidence. They seek assurances the market wants your product or service and big growth is on the horizon. For most offerings, this translates to “are they buying?” But many early-stage ventures don’t yet have anything to sell, and therefore don’t have revenue. With no chance to make a sale, founders typically ask prospects for the next best thing: “Once we launch, would you buy?” When customers don’t need to take out their credit cards, you’d be amazed at how many answer “yes.” But once you launch, much of that interest may not convert. And that’s OK. After all, this is the nature of the startup. What’s important is that during fundraising, founders don’t give this early “interest” more credit than it deserves. It’s valuable — and often the best feedback available — but it’s not traction.
7) Not telling the story
Many fundraising presenters get right to the point: Here’s a problem; here’s our solution; here’s how much money we’ll make. If the issue, opportunity, and return are clear and compelling, these ingredients could translate to a successful venture. But when a founder starts delivering the pitch, they need more than a viable idea. They need a story.
The world of startups is filled with interesting ideas and lots of uncertainty. And investors are inundated with slide decks and founder presentations. The ventures that get funded are the ones that introduce a great opportunity and make a lasting impression. Sales projections, competitor analyses, and founder biographies are critical elements in a business pitch, but without a story that captures the attention of a busy investor audience, quality ventures can go unnoticed and unfunded.
8) Not exhausting other options
All these costly mistakes make one critical assumption: you need to fundraise from professional investors. While angel and venture investing are crucial to the startup ecosystem, they aren’t essential for every venture. If a venture doesn’t need to give up equity, board seats, and control, I have a simple piece of advice: Don’t. Bootstrapping, self-financing, friends and family rounds, and many other options may be sufficient to launch and scale a startup. And while these options may not be enough to achieve the success you desire, I recommend at least pursuing them first. I meet many founders who are surprised by the creative and diverse funding options available, and the savings they create. They just need to take more time to look, assess, and imagine.
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