Money is what ultimately runs businesses. Every organization relies on money to run its operation, finance growth, and acquire additional resources. There are many ways of building startups, one such way is raising external capital from FnF, angels, VCs, and other investors. Venture-backed has become one of the mainstream ways of building companies of late. More so because of the extraordinary amount of attention venture-backed companies and their fundraising news receive. However, it is not the only way to build companies. There are at least equally excellent companies that are built through bootstrapping. If you want to build a venture-backed company, fundraising is an important skill. Your ability to successfully raise money can define the success and failure of your company.
Fundraising is a complex process that requires both creativity and technical knowledge. It involves a delicate balance between these two skill sets, which can only be achieved with a considerable investment of time, effort, and patience.
Alejandro Cremades writes in his book, The Art of Startup Fundraising, “The best entrepreneurs are not the best visionaries. The greatest entrepreneurs are incredible salespeople. They know how to tell an amazing story that will convince talent and investors to join in on the journey.”
To that end, fundraising is partly a skill that we all should learn and can benefit from.
Purpose of fundraising
Fundraising for a startup is to acquire the necessary capital to launch and grow the business. This capital can be used to fund product development, marketing, hiring new people, and other key business activities. The ultimate goal of fundraising is to create a sustainable and profitable business that can continue to grow and succeed in the long term.
In addition to providing essential fuel for growth, fundraising can also help startups to gain valuable exposure and build relationships with potential investors, industry experts, and strategic partners. This can lead to future opportunities for collaboration, mentorship, and business development.
Fundraising can also work as a validation for a startup's business model and vision. By attracting investment from experienced investors, startups can demonstrate that their business idea has real potential and that there is a market for their product or service.
Fundraising plays a crucial role in the success of startups, providing them with the capital and resources they need to launch, grow, and thrive in the highly competitive business world.
Earlier we discussed how to prepare a convincing pitch deck, in today’s article, however, we look into some of the common mistakes people make when it comes to raising investment. However, it is important to note that there are no strict rules that you have to follow a certain approach to raising money. Raising money is more an art than science. You can follow any strategy that works for you. However, keeping this set of mistakes in mind is likely to help you more in your fundraising drive than otherwise.
Common fundraising mistakes to avoid
Running a fundraising program is a challenging task that demands dedication, resources, and a significant amount of hard work. Despite efforts to run and manage such events, errors are inevitable. While some mistakes are minor, others can significantly impact the organization and its activities. However, it's possible to prevent costly mistakes with the appropriate mindset and strategy.
On the other hand, preventing costly mistakes can safeguard not only fundraising events but the entire program. There are common mistakes that fundraisers and organizations make, which everybody can and should avoid to ensure success.
Thus, the following mistakes founders should avoid while raising funds-
01. You need a deck, so make one
A deck is a document that contains essential details about your startup that you share with potential investors. It typically includes information about the problem your startup is addressing, how you plan to solve it, details about your team, the market size, your strategy for entering the market, the timeline for achieving your goals, and whether technology plays a role in your solution.
Some startups may believe that their product is so impressive that investors won't require a deck, while others may believe that investors should rely on their word and hence do not need to provide a deck. Alternatively, some may feel uneasy about sharing a deck before the meeting and plan to send it later. However, this approach is not advisable.
As Alejandro Cremades says, “Business success requires business preparation. You don't have to be a master tactician, but you do need to have a plan in place. This plan will act as a foundation for everything you want to achieve.”
When you are considering raising investment, it is wise to start with the assumption that you are in more desperate need of investors than they are of you. To that end, it is better for you to follow things that would make it easier for you to meet and convince them to put money in your company. Therefore, the first rule usually is to send a deck that clearly answers the question, "What makes it worth my time to meet with you?"
You don’t need to prepare a perfect pitch deck. Start with a minimum viable pitch deck. Share it with people. Improve as you get feedback and go along.
02. Lacking what and why
Many founders tend to go into abstraction when it comes to explaining their ideas. This makes it challenging for investors to understand a startup's purpose and value proposition after hearing a pitch. To help them visualize how your business operates and how users engage with your solution, provide specific instances of the problem you're addressing rather than stating it in vague terms. Simply saying that your product improves process efficiencies doesn't offer a clear image. Instead, explain what users had to do before and how their experience has improved with your solution.
To help investors understand your business, it could be useful to approach it visually. Like a cinematographer who starts with a wide shot to establish the setting and provide an overview, then moves to tighter shots for details. Similarly, you need to give investors the necessary context before diving into specific details about your business.
03. Overvaluing the company
Overvaluing a company is a common fundraising mistake that can ultimately harm the startup's chances of success. It's natural for founders to have high hopes for their company, but setting unrealistic valuations can turn off potential investors and make it harder to secure funding.
One reason why overvaluing a company is problematic is that it can lead to dilution of ownership. If a startup is valued too high, investors will want a larger percentage of ownership for their investment, which means founders will have to give up more equity. This can limit their ability to attract future investors and ultimately hurt the company's growth prospects.
Another reason why overvaluing a company can be detrimental is that it can make it difficult to achieve the valuation in the next round of funding. If a company is overvalued in the early stages, it may be hard to show the necessary growth and progress to justify a higher valuation in subsequent rounds. This can lead to a down round, which can be a major red flag to future investors.
To avoid overvaluing a company, founders should research the market and the competition thoroughly to determine a realistic valuation. They should also consider seeking the advice of experienced advisors and investors to help them set the right valuation. By avoiding this common fundraising mistake, startups can improve their chances of securing funding.
04. Failing to understand your audience
You know your business far too well. You no longer remember what was obvious about your market space and what you learned while working on your business. This leads founders to assume that their audience of investors understands these things too. But actually, they do not.
Moreover, it's important to note that investors have different priorities compared to both you and your customers. While you focus on running your company and customers are interested in solving their problems, investors are primarily concerned with ensuring that their investment succeeds and makes then excellent returns. So, you should understand your audience and communicate accordingly. Here are a few helpful tips to effectively communicate with investors:
05. Weak communications
In a perfect world, investors would assess your company based on the merit of your idea, plan, and execution. Unfortunately, we live in an imperfect world where people often judge a book by its cover. Often, investors are unable to recognize the true potential of a business beyond its initial appearance. They may overlook the valuable qualities and assets that lie beneath the surface if they are not presented effectively.
Communicate clearly and effectively. With so many startups vying for limited funding, it's essential to convey enthusiasm and energy in every interaction, including in written communication. Your excitement about your business should be evident, as it is contagious and helps investors get excited too. Even if you're naturally introverted, you may need to push yourself to be more energetic and expressive than usual to demonstrate your passion for the opportunity.
When presenting information, try to incorporate stories and narratives whenever possible. Stories can be more impactful than just presenting facts or data. Human beings are wired to understand and remember stories much more effectively than dry information. An excellent example of this is Steve Jobs, who was a master at using stories in his presentations. Instead of merely stating the dimensions of the MacBook Air, he used the story of how it could fit inside an envelope. Every article on the event wrote about that example. The impact was so significant that even after many years, people are still discussing it.
Aesthetics matter. Because appearance is the most important aspect of making a good impression. It's not just about your business plan and ideas, but also about how you present them. Everything from your personal appearance to your presentation materials and website should look good. If your pitch deck or personal grooming is messy, it can leave a negative impression on investors and make them doubt your ability to manage a startup. On the other hand, paying attention to these details and showing mastery over the little things can subconsciously enhance investors' perception of your company.
Finally, it is essential to become proficient in your presentations. Rehearse your pitch numerous times, alone and with a discerning audience. If possible, record a video of your presentations to analyze your mistakes. Without putting in the effort, it is difficult to appear at ease. Furthermore, it is challenging to adjust to your audience's responses, questions, and interruptions unless you know the presentation thoroughly enough to deliver while concentrating on other aspects.
06. Overpromising and under-delivering
Avoid making grand promises that you cannot fulfill, as this will harm your credibility in the long run. It's important to be truthful, transparent, and realistic about your company's achievements and goals. When discussing the services, market reach, and impact, try to be as consistent as possible. Strive to meet stakeholders' expectations and then go above and beyond to provide exceptional service that exceeds their expectations.
One of the main reasons startups overpromise is the belief that it will help them secure investment. However, this approach can backfire if the company fails to meet the expectations set during the pitch. Investors expect startups to have a solid understanding of their market, customers, and competition, and to make realistic projections based on their current situation and growth potential. Overpromising can create unrealistic expectations and make investors question the startup's credibility and integrity.
07. Failing to make commitments
Founders sometimes lack clarity when it comes to timelines and milestones. Their presentation may mention how they will use the funds but fail to indicate what exactly will be achieved. Investors are interested in knowing what specific improvements will be made to the product, how many new customers will be gained, and how much revenue will be generated after the investment. These achievements should be linked to the milestones that must be reached prior to the next round of financing. Demonstrating that you can secure the next round of financing at a high valuation requires proving that the funding you are getting now will lead to significant accomplishments.
Demonstrating a track record of fulfilling commitments is even more impressive. Investors recognize that the startup industry is unpredictable and that your projections may be little more than guesses. However, investors want to be aware of your objectives and expectations. Clearly outlining commitments and milestones indicates that you have carefully planned your strategy and have a clear understanding of how to progress toward your long-term goals. This creates a sense of confidence.
08. Hiding facts
Startups may encounter certain issues that are not immediately visible, such as co-founder issues in the past, down rounds, or pivots. It's possible that the startup does not have robust intellectual property protections or has developed its solution using third-party components. While you don't need to disclose all of these limitations upfront, you shouldn't conceal them from investors during the due diligence process either. If investors find out that you've been hiding these problems, they may doubt your integrity. Trust is an essential component of early-stage investing.
Once investors invest their money, they usually have little control over the startup. Therefore, it is crucial for them to trust that the founders will continue to act with honesty and consider the investors' interests. Anything that shakes this trust can endanger the deal.
09. Failing to follow up
Failing to follow up with investors after a pitch or meeting can be a critical fundraising mistake for startups. Many founders make the mistake of assuming that the ball is in the investor's court and that they will reach out if they are interested. However, in reality, investors often meet with several startups a day and may forget about your startup if you do not follow up with them.
Following up with investors shows that you are proactive, committed, and interested in their investment. It also gives you an opportunity to address any questions or concerns they may have after the initial meeting. A prompt and professional follow-up can increase your chances of securing funding and building a positive relationship with investors.
To avoid this mistake, it is essential to have a clear follow-up plan in place after your pitch or meeting. This plan should include sending a thank-you note or email after the meeting, reiterating the key points of your pitch, and highlighting any next steps or action items. You should also schedule a follow-up meeting or call to discuss progress and address any new questions or concerns.
Fundraising is critical for most companies. Therefore, it's crucial to determine what strategies are effective with investors and prepare accordingly. This will help save valuable time and money, both of which are limited resources that founders require more of.
Fundraising is a critical aspect of building a successful startup, but it can also be a minefield of mistakes that can derail a company's growth and development. By being transparent, realistic, and open to feedback, startups can navigate the fundraising process successfully, build trust with investors, and secure the funding they need to achieve growth and build a lasting company.