If you’ve never raised capital for a startup, the road ahead may seem daunting. Fundraising is a long process and there are plenty of pitfalls new founders should try to watch out for. Here are some common startup funding mistakes new founders make along the way and how you can avoid them on your journey.
Timing it Right
Don’t jump the gun by pursuing funding too early. If bootstrapping is an option, we would recommend pursuing that before going after investors. There are two primary reasons for this; 1) the sooner startups begin to sell equity stakes in their company, the sooner they begin ceding control, and 2) founder dilution begins. Of course, as a startup’s valuation increases, early dilution may be counterbalanced. That said, it’s prudent to minimize loss of leverage and the risk of over-dilution when possible.
Equity Dilution in Startups
Miscalculating the Time Commitment
Starting, running, and building out a business is time-consuming, to say the least. Now add all the work that goes into fundraising on top of everything else that needs to get done on a day-to-day basis – it’s a lot.
Founders must be realistic about how much time they are willing and able to commit to fundraising. From finetuning your pitch deck and identifying potential investors to pitching and negotiations, you’re looking at a long process. It’s easy to let fundraising efforts fall on the back burner when there’s a business to run, but if you want to raise successfully, you’ve got to put in the time and effort.
Raising Too Much or Too Little
Another common mistake is over or underestimating how much funds you really need. Raise too little and you’ll have to raise again sooner than anticipated, which may lead investors to question your planning. Raising more than you need is also not ideal, as it can lead to greater dilution. It could also increase the potential for a down round the next time you raise money. When determining how much you need, you want to be as efficient as possible.
Startup Financing: Dealing with a Down Round
Skipping Your Homework on Potential Investors
When it comes to finding investors, you want to make sure you’re the right fit for their portfolio before reaching out. Typically, this means they should have a history of investing in companies of your size, in your industry, and at your stage. On the flip side, you also want them to be the right fit for you. If you are able to get in touch with other companies they’ve invested in, do so. You can get a good idea of what their reputation is like this way.
Not Connecting the Financial Dots
You should know your numbers front to back, for yourself and for investors. Investors will want to know your costs, revenue, projections, etc. because these numbers can tell a lot about how a company is doing. As a founder, these numbers present an opportunity to further shape and solidify your story. While numbers on their own may not be particularly compelling, you can use them to draw a line between where you are now and where you’re headed.
Know Your Metrics: Startup Financial Statements
Going it Alone
To make things easier on yourself, it’s advisable to hire an attorney and an accountant who specializes in startups. They will be able to spot potential snags you may miss to ensure that all your legal and financial reporting ducks are in a row when it comes time to make your pitch.
Getting Too Technical
As an expert in what your startup is doing, it’s easy to get too far in the weeds when putting together a pitch deck for investors. Really, it all comes down to the problem you’re trying to solve and how you propose doing it. Ideally, a pitch deck shouldn’t exceed ~20 slides, and should focus on hitting these high points:
- The problem
- Your solution
- Product & addressable market
- User traction
- Financials
- How much you’re raising & use of proceeds
- Your team
Takeaways
Fundraising is no walk in the park. Before you make your first pitch to an investor, there is a lot to consider and ample pre-work that needs to get done. It takes time, attention to detail, and careful planning, but the more you do it, the easier it will become.
If you’re an early-stage startup or small business looking to raise capital, drop us a line. We’re always on the lookout for new investment opportunities for our investors.
