When starting a business it’s important to focus on what to do in order to effectively raise capital. But it is equally important to learn from others’ mistakes, and to take to heart the lessons that can be learned.
What are some of the common mistakes made in the fundraising process that should be avoided? The answer could be in this excerpt from Alejandro Cremades’ book “The Art of Startup Fundraising”.
According to Cremades, these are three big mistakes to avoid when fundraising:
Failing to Connect
Lacking connections puts startups and their founders at a serious disadvantage. Do not underestimate the value of connections!
Business (and fundraising in particular) is still more often about whom you know, not what you know, so invest in making connections and building relationships. When I was first starting out, I would never miss an opportunity to attend an industry event and give talks or provide insights or commentary. This would ultimately increase my reach and network.
The ability to connect carries over to circulating your investment opportunity, as well as following up. Previous chapters discuss some of the things to look for and to avoid in an investor. It’s wise to screen for investors who have domain expertise, are well connected themselves, and have financial strength. Yet, even before pitching, startups need to make sure that they are connecting with and presenting to the right investors. Do you have an Ideal Investor Profile?
Startups should have an Ideal Investor profile for each fundraising round. Factors to consider may include:
- Average size of investments
- Industry match
- Round of funding the investor specialises in
- Investment goals and timeline
The above will all help startups, even when connecting and pitching new investor contacts, because it’s part of creating a good fit. That’s going to feel a lot better for you. Even if they don’t invest, you should get some valuable feedback rather than simply being dismissed because your startup doesn’t fit that investor’s criteria.
When you are in the fundraising process, it is ultimately not only about the capital: It comes down to value. This is a good opportunity for you to cover some of the holes that you didn’t realize existed in your plans. This may come from potential customers or existing customers. You will need to cut through the noise and get the best feedback and share it with your team in order to improve some aspects of the business. Moreover, it will be a good chance for you to shape up the pitch and the way you are telling your story.
This is also a building block for delivering your pitch and effective follow-up. Cold spamming investors is likely to be more counterproductive than helpful. As already mentioned, there are a few stunning success stories in which entrepreneurs have managed to get emails through to investors like Mark Cuban and get funded. But whether making initial contact or following up, it will be those who personalize their messages who will be successful. This means pitching the right opportunity to the right investor and in the right language. Cuban is one of the easiest examples because most are pretty familiar with how he speaks and his style.
Venture capital firms, for example, place a lot of weight on the introduction. They use this as social proof. Depending on who is introducing you, they will take your pitch more or less seriously. Normally you would want to have the introduction from a founder who has given an exit (which means a startup in which the firm has invested money and received a good amount in returns).
In any case, people do appreciate entrepreneurs who will make the effort to hunt them down and follow up. And sometimes this is a test of your grit and innovation skills. On the Ignite Your Sales Team podcast, Rich Cohen, who is a sales leader for Tony Robbins’ Robbins Research, says that he’ll purposely blow candidates off, and see who will be successful at getting through to him on the phone, getting into his office, or rebutting him over email. So make connections, connect in a way they can relate to, and follow up.
Clarity and Doing What You Say
We live in a crazy time, an era in which it is incredibly difficult to find anyone or any company that will do what they say or have promised. This is what has created immunity and aversion to advertising. You go into the car dealer after seeing an ad and by the time you leave, that $399/month lease on the new Tough Rider is closer to $999/month, plus about the same amount again in a deposit and insurance, instead of the “no money down” sign-and-drive deal you expected. You sign up for a new cable TV and Internet service that guarantees 24-hour response times, and then that $29-a-month deal winds up being closer to $100/month, if the product ever works or you can ever get someone to provide service. Or you switch your cell-phone service to an “allinclusive” plan for $150 a month, and then get a $3,000 bill for roaming and extra data charges and taxes.
You know what that feels like. It doesn’t matter if it comes down to a lack of clarity or straight-up being hustled, it doesn’t feel good, right? It makes you not only want to tear up that contract, but sell off your shares in that company, even at a loss, just to stick it to them. And you’ll be sure to share the negative experience with everyone you know.
It all comes down to some of the most basic strong emotions we have, like fear and shame. No one wants to be made a fool of. That is more of a driver than the financial side. No investor wants what they believe to be a “great investment” to become a frustrating embarrassment. To overcome this, startups and their founders must be in alignment, deliver clarity, and stay
congruent. It comes down to one word and that is “integrity.” Stand by your word.
Mistakes that often derail startups in this area include:
- Not having a clear pitch
- Lack of authenticity
- Changing your story
- Name dropping without having much of a relationship with the individuals
When it comes to raising venture capital, I’m commonly talking about fundraising from people and organizations with vast differences in culture, location, and perception. So you can’t assume that people know what you mean, or what you are thinking. You can’t (and shouldn’t) try to fit it all in a pitch deck, elevator pitch, or executive summary. But that doesn’t mean you can’t be clear and thorough.
White lies, embellishing the truth, hiding the facts, and grossly overexaggerating are all types of lying . . . period. They will destroy your reputation, credibility, and opportunity to raise funds. Be realistic. If you are pitching a billionaire investor, multibillion dollar venture capital fund, or even an angel with several million more in the bank than you have, you can bet they probably have some level of intelligence and experience. You are not going to fool them, or win them over with grand overly optimistic revenue and market-share projections, or by hiding costs.
Many try to add a little glamor to their executive summaries or decks, and in the process they sabotage themselves. Either you are going to be seen as a fraud, or simply unrealistic and unequipped. Either way you are going to be seen as a time waster.
I like what Warren Buffett says in this regard—that it takes a lifetime to build a reputation but only five minutes to destroy it.
Have conservative profits and revenues, and maybe even higher-than-expected costs. Then you can always explain that this is your worst-case scenario or minimum expectation, but that you hope for far better results. That can win you a lot of extra points. Most VCs and investors who are experienced in your domain will easily be able to pinpoint areas where you can bulk up the right numbers, especially when they add their insights and capital.
I always recommend overdelivering. Remember that you will meet the VC and then you will follow up with them in three months or so to meet and discuss progress. At this point it would be very powerful to show how you have crushed your goals and you will get them excited. Much better than having to explain the reason behind not fulfilling what you said you would on your first meeting.
Don’t change your story. You shouldn’t need to if you have your entire team on board with your messaging, and you’ve done your own research well before putting together a plan in the first place. You might have some pivots as you go along, but multiple pivots and story changes during the middle of raising a round of funding won’t make things easier.
Entrepreneurs also need to differentiate between what a real pivot or evolution of their startup plan is, and when it is just a Band-Aid covering a failed startup. Your potential investors will know.
Self-Sabotage in the Deal-Making Process
One of the biggest mistakes startups make is taking too long to complete around. Many might find that the statistics show it can be a lot quicker to raise money than expected. Don’t cut yourself short and run out of money, but don’t take too long shopping around or sealing the deal with interested investors. The risk is that your deal can go stale. That money could go to someone else instead, maybe even someone else operating in your space.
Investors are like sheep. They go where everyone else is going—they see it as validation from the market. For that reason you need to build momentum and get everyone with whom you are speaking excited about your vision and where you are taking things, as soon as possible.
How long should it take to raise money? According to data from a survey published on TechCrunch, the average time to raise a seed series as of mid-2015 was 12.5 weeks. That included contacting an average of 58 investors and going to 40 investor meetings, for an average raise of $1.3 million. Yet, 17 percent of startups reported it took them over 16 weeks to get funded, with the longest time being 40 weeks.
During Series A rounds, TechCrunch reported an average timeline of 9.6 weeks, with fewer meetings needed to raise the same amount of capital. One Forbes report recommends that entrepreneurs expect four to eight weeks to get to a “yes,” for additional rounds of funding.
It is interesting to see how many startups drop out of the fundraising race within a couple months, and to see those who were successful reporting taking longer than expected to raise money. A big part of being successful is sticking with it. But it is also about knowing when to hold on and when to move on.
Check out some crowdfunding campaigns and see how their timelines relate to their fundraising success. Glancing at some donation crowdfunding campaigns (because they are easy to compare in volume), there are some clear trends. One of these is that people can be hesitant to fund a campaign that doesn’t offer a return for a full year or two . . . and this applies even if people are hoping for only a T-shirt. Momentum is a big deal. It can create that sense of urgency that gets investors to actually take action. So don’t start too early or take too long.
What is really shocking is how many startups sabotage their investments after receiving offers. It can be a lot of work to get to a “yes.” Even if the yes comes easy, odds are you are not going to get a second chance if you blow it. Even if you go to other investors for later rounds, they will have likely heard of you already. One of the main ways that startup founders sabotage themselves is by changing the terms. You should know what terms you can and can’t work with in advance. Know your negotiating boundaries before walking into the room. Don’t get greedy and try to squeeze out more after you’ve made an agreement.
Another turnoff is when a founder goes to the market with terms that are a little bit higher than usual. What anyone would do when this happens is decrease the price of the valuation. However, this would send negative signals to the market, where investors could interpret this as proving that you do not know what you are doing or that investors do not like your deal. Try to keep terms as attractive as possible for you and for investors.
Then there is reviewing the actual paperwork. Make no mistake—investors are in this to make money. They are in it to minimize risk and maximize upside potential. And they normally have very good lawyers to help them with the paperwork.
Founders must ensure they review each clause in the offering documents. Read all of the fine print. If you don’t, you could be sabotaging your own plans. If you don’t understand something, ask, get some feedback from your legal team, and don’t sign until you are comfortable with an agreement.
See more about “The Art of Startup Fundraising” here.
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