Every year, thousands, if not millions of entrepreneurs come up with brilliant business ideas. If you are one of them, you soon realize that you need funding for scaling your startup.. and thus you start looking for investors.
However, only two out of 100 ventures catch the attention of investors. This means that about 98 percent of startups looking for funding are rejected.
In fact, about 600,000 businesses get started in the United States every year. Only about 300 of these get funded.
Why are so many startups rejected? What are the rejected startups doing wrong? What differentiates the 2% from the rejected once?
Maybe you think that the rejected businesses are based on unsound ideas. But in most cases, it’s not about faulty business ideas, unsatisfied customers, inadequate products/services… It’s because the process of securing funds is not as straight forward as it may seem.
Startup fundraising is like chess, you have to consider every small move you make, one miscalculation and bam! Your opponent sweeps through your pieces like an avalanche. Such is the life of fundraising… One mistake and your chances are gone.
Every detail is important. What are you looking for in an investor? What do you need to do to stand out? How will you capture the attention of the investors you are targeting?
A lot has been written on what startups should do once they have secured funding. But there’s not nearly enough actionable advice on what mistakes deny 98 percent of startups funding and how they can avoid making them.
Securing funding is challenging, even for the most promising startups. It therefore pays… literally… to refrain from committing the fundraising sins we are about to discuss.
Deadly Fundraising Sins that can Kill your Startup
Sin 1: Failing to Understand how Investors Work
The Venture Capital (VC) industry is quite structured. If you don’t understand how they work you are bound to make very expensive, literally (okay, enough money jokes) mistakes in your startup fundraising efforts.
The first mistake that startups make here is failing to understand that VC’s have a life cycle, they are not perpetual. The VC lifecycle is very specific: Fundraising, Investment, Management, and Exit.
Many startups will approach investors with no consideration of what stages of the life cycle the investors are at. Very bluntly put, it is a waste of time for startups to approach investors who are in the third and fourth stages.
Startups also fail when founders don’t realize that different investors invest in different industries.
They spend their time approaching investors who are incompatible with their venture, which is another waste of time and effort.
Tip: In terms of industry, it is not enough that an investor has invested in your industry before. If an investor seems to have made a lot of investments in a particular industry, they may be unwilling to overload that space.
So, as a startup founder, research on what each potential investor is currently willing to invest in and what they are currently unwilling to invest in.
This will save you valuable time and effort by guaranteeing that you only approach investors that are most suited and open to you in the moment.
Another reason why startups fail is because founders don’t understand that most investors invest at very specific business stages. That is, either the Seed stage, Series A, Series B, Series C, or beyond.
It is pointless for you as an early startup founder to spend your time trying to secure funding from an investor who primarily invests in later business stages.
Also, startups fail to secure funding because they don’t understand that investors have a minimal amount they are looking to invest.
Similarly, it would be futile for you to pitch your startup idea to an investor who primarily invests in Unicorns when you know that you only need $1 million because you never intended your startup to hit unicorn status.
Tip: The size of an investor’s fund tends to indicate the amount they can invest in a single deal.
So, as a founder, first determine how much capital your startup needs from investors. Then research on the fund sizes of your potential investors and zero down on only those investors who are most likely to invest in a startup of your scale.
For example, if the size of the fund is $1 billion, it is likely that the investor will not consider investing less than $10 million in a single deal.
What you should do
Research: Take time to study and understand how the investment world works. It’s the difference between life and death for your startup and its fundraising efforts.
These are the questions you need to be able to answer.
- How do funds get constituted?
- What industries do different investors invest in?
- At what stages do different investors invest?
- What are the typical ticket sizes of each investor?
- What are the investor’s return requirements?
- Are they willing to make further investments in a startup in my industry in the first place?
Narrow Down on Investors: So, you have answered the questions above.
Now, zero down on investors that are most suited to you and create a ‘potential investor’ list.
You are no longer shooting in the dark. These will be the investors you approach and who are most likely to fund your business.
This guarantees that you aren’t wasting time pitching investors you have no chance of securing funding from. You are instead increasing your chances of raising funds by approaching the right people.
Sin 2: Overlooking the Importance of Relationships with Investors
‘You can’t mix business and pleasure.’
Whoever said this must not have been thinking about startup fundraising.
This is another common mistake startup founders make; assuming that the money is the most important aspect in their fundraising efforts.
Actually, relationships are the most important factor and arguably the determining factor in whether fundraising efforts are successful or not.
Having quality relationships with investors has the greatest impact on a startup’s chance at lasting success. Money depletes faster than you can imagine, but a good name and reputation will stand the test of time.
The mistake startup founders make here is that they get so desperate for capital that cultivating good relationships is the last thing on their minds.
When startup founders are in this mindset, they easily forget that once the investor has written the startup a check, he becomes a key part of the business; a partner.
They forget that raising capital comes at the cost of equity. For this reason, they try to run the business as though they are still on their own, sidelining the investor.
This ruins the founders’ relationship with the investor and becomes detrimental to the team’s reputation in the investor market compromising chances for future funding from other investors.
What you should do
Remember you are Entering a Relationship: Think of startup fundraising as entering a relationship; a marriage… The marriage is bound to come with new outlooks, information, industry expertise…
So be very strategic about who you pursue and receive funding from.
Prior to sourcing or accepting funding, ensure that you weigh the pros and cons of taking capital from each potential investor.
Ask yourself this:
- Does this investor have experience in my industry?
- Is this a partner I would enjoy working with for the foreseeable and possibly long future?
- What is the investor’s reputation working with other startups?
- Can you trust this investor not to dull the original business vision?
Answering these questions will guide you into choosing investors that are most suited to you.
It will lead you into partnerships with the right investors that will not only grow your business but open up future funding opportunities for your startup.
Focus on Building High Quality Relationships: Place a lot of emphasis on building relationships with investors that are mutually beneficial.
A great relationship with an investor will ensure smooth collaboration in the running of the business as well as boost your reputation in the investment industry.
How do you Build Great Relationships?
Be humble (but confident), show gratitude, and welcome new and potential investors to actively participate in your venture. Be honest, transparent, and a good listener.
This will earn you a good name as a leader and a team-player and open up a whole world of investment that will ensure the survival and success of your startup.
Sin 3: Lacking Vision, Objectives, and Self Awareness
This is perhaps the biggest mistakes startups make in their fundraising efforts; approaching investors without a clear vision.
The first thought in any investor’s mind will be, ‘If you don’t have a clear vision… If you don’t have a focused idea for your business venture, then where are you leading me?’
It is not unusual to be caught off guard by a question from an investor on an aspect you had not considered.
However, while it is understandable that you may not have all the answers, it is completely unacceptable for a founder to not have a clear theme for their business.
Tip: Investors want to be able to actually visualize your startup’s journey and see where it’s going to be in the next five or ten years.
So, show investors a clear step-by-step path from your current valuation to a possible future valuation. You can do this by showing specific company initiatives and how they improve your metrics over time.
It’s quite simple; investors need to feel confident that your startup has the potential to make them profit.
Startups also fail because they lack clear funding objectives.
How can you be looking for funding when you don’t know what the minimum amount is you need?
Fundraising normally takes months and startups that underestimate the financial needs of their business run out of money. This either leads to a stall in operations or the collapse of the startup all together.
What should you do
Have a Comprehensive Vision. This is your business, your brainchild. Tap into that passion you have for it and really take the time to reflect on what direction you want the business to take.
Visualize its future. Gather your team and just talk about the business and what it means to each of you.
- What direction is your business heading?
- What approaches will apply to your business and why? Look at how your business model might evolve over time.
- Where do you want to be in 5 years? In 10 years? Can you present this vision clearly to an investor?
First, ensure you that the answers to these questions are engraved in your mind. Then proceed to sell the vision by demonstrating how your approaches will lead you to your end goals.
Bring out the vision clearly and passionately and this will inspire confidence in potential investors.
Tip: One of the biggest indicators that you don’t have a clear vision is when you agree with every suggestion that an investor has for your startup.
A founder with a clear vision should be able to showcase and defend why they are doing what they are doing.
Find out how much Capital you Need: How much money do you need to turn your vision into a reality?
Start working with your CFO about five months before approaching any investor. This is sufficient time to determine exactly how much capital you will need.
This will also ensure that your capital doesn’t run out mid-operations or before you hit your next milestone. The result of which would be disastrous.
In a nutshell, if you want to impress investors, you must be self-aware (know exactly what you want). Have a very clear vision for the startup and be able to confidently and passionately communicate that vision to the investors.
Sin 4: Not Including or Providing Incorrect Data, Metrics, and Financials
Failing to provide a financial analysis is another deadly sin commonly committed by startups during fundraising.
It is detrimental because investors need to be confident that the team understands their cash flow and how they intend to spend the money they receive.
Startups also fail when they overestimate future revenue. Yes, financial forecasts can be inspirational to investors; but generating unrealistic numbers puts them off.
The team ends up seeming very untrustworthy and no investor will invest in people they feel they can’t trust.
What you should do
Understand and Present all Financial Dynamics: I think it goes without saying that if you want to stand a chance at fundraising, failure to include a financial analysis is out of the question.
So, what you need to do is to thoroughly understand and communicate your startup’s financials. That is in the form of balance sheets, P&L accounts, cash flow analysis… And ensure that what you are presenting is accurate.
Create Financial Projections and Analyze your Revenue Potential
What is your current net income? What is your projected growth rate in the next one year? 5 years? How will you achieve this?
Answer these questions and present your findings to the potential investors. But remember to keep it realistic. You will come off as a highly organized startup that knows exactly what they want and how to get there.
Remember, investors will grill you with questions. After all, this is their money on the line. The worst thing that can happen to you is that they ask you a financial question and you are unable to answer.
The investor thinks, ‘You mean to tell me you’re not even sure what’s going to happen to my money?’
This brings us to our next pointer.
Present Accurate Information/Be Honest: Relax… you’re doing fine. As we mentioned, it is not uncommon to be caught off guard on an aspect you had not considered before. As long as it is not anything too obvious.
If you happen to be in such a position, do not make stuff up. Instead inform the investor that you had not considered the matter, thank them for bringing it to light, and assure them of your follow up.
Tip: Your chances of raising funds do not increase by trying to constantly appease investors with false information.
Honesty, even at the risk of seeming incompetent carries with it an aura of transparency. This indicates to the investors that you are a trustworthy person/team and more often than not, they will be inclined to give you a chance.
Draw a Compelling Story
Numbers alone do not bring out a very interesting nor compelling story.
At the end of the day, investors are human and you need to appeal to them. When it comes to startup fundraising, it’s up to you to connect the dots and draw a compelling story line between your startup’s financials and the future of the business.
So don’t be stiff, don’t just mention numbers. Incorporate a story. Share your vision. Make it interesting for the investor.
Sin 5: Trying to Go the Mile Alone
‘A single twig is easily broken, but a bundle of twigs is strong.’ – Chief Tecumseh
This old saying has never been truer than with fundraising.
Founders fail to identify the combination of skills they need as well as the right people to cover those areas. Instead they try to handle every aspect of the fundraising process themselves.
For example, you may find an MBA founder who does not have the technological background to clearly bring out tech aspects of the business attempting to.
Or alternately, you may find a tech founder attempting to explain the financial analysis when they have no business acumen at all.
News flash! You can’t do everything. And even if you can, a one-man-show portrays a very weak image of the team.
Have you noticed that very few super-successful startups have a single founder? In fact, I can’t even name one off the top of my head. It’s highly unlikely that this is a coincidence.
What’s so wrong with having a single founder?
Well, nothing really. But it makes investors wonder why the founder was unable to convince anyone to form the business with him. It makes investors wonder, What’s wrong with the idea? What’s wrong with the person?
Tip: It’s not just about background and skills. Personality traits also come into play. For example, introverts should find extroverts to balance out their team, and vice versa.
What you should do
Remember you can’t do it Alone/Choose a Team: Yes, you’re passionate about your startup, you love it, it’s your brainchild. It’s understandable that you want to retain primary control.
But doing it alone, and trying to go the whole nine yards in fundraising is not a winning strategy.
Investors want to know that the startup is backed by a strong team with a diverse skill set necessary to turn the vision into a reality.
As the founder, identify your weaknesses and bring in extra firepower to cover those areas.
Choose highly qualified and motivated individuals to cover all key departments of your startup.
This will result in a well-rounded, stronger unit, and investors will be able to identify this.
Encourage Active Participation
When preparing a pitch for investors, even if only you will get to speak, let each member of the team handle an aspect of the pitch that they are specialized in.
Tip: Ensure that there are no contradictions of information or opinion amongst team members. If there happens to be, iron them out before approaching investors. You don’t want to come off as divided or disorganized.
During the pitch, when technical questions of a field other than yours are posed by investors, call upon the team member who specializes in the area to elaborate.
Try to have some or all team members contribute during pitch presentation.
This will enable you to display the strength of your team’s diversity to your potential investors. It will also allow you to present a pitch that covers all areas of your startup very clearly and satisfactorily.
Sin 6: Presenting a Poor Pitch
A pitch deck is quite possibly the most important document a startup produces in its fundraising efforts. Startups that get it right have the potential to generate millions, not just at the seed stage but even in later stages.
On the other hand, startups that get it wrong could jeopardize current and future funding and growth opportunities.
Remember, investors see thousands of pitch decks every year.
What will make yours stand out? What has made pitch decks like Facebook’s receive such acclaim? How were they able to make such a good impression to investors?
What you should do
Be Unique and Communicate Passion
Don’t get caught up trying to stick to a ‘perfect pitch deck’ template. This approach will make your pitch come off as robotic and it will certainly not be interesting to your investors. After all, they see similar pitches all year long.
The best way to pitch an investor is to explain all the necessary aspects of your business while placing emphasis on the parts of your business that actually excite you.
Investors are not machines, they can sense passion. Investors want you to give them a narrative that touches them emotionally.
Take for example the Dwolla pitch deck. CEO Ben Milne used his own personal experience to bring out the idea behind the venture all through the pitch. It was this personal touch that really had an impact on investors and secured funding for the company.
Similarly, add a personal touch to your pitch and bring it out passionately and it is sure to resonate with investors.
Babak Nivi, founder of AngelList said, ‘Investors invest in stories, not businesses’. This goes to show you how a personal touch in a pitch differentiates it from millions of others out there.
Storyboard your Pitch Deck
Apart from giving your pitch a personal touch, it is important that it has an interesting narrative that will keep your audience hooked.
Gather your team and brainstorm on ideas, stories, and experiences that will dazzle your potential investors and bring out the true and practical value of your startup.
If you succeed in captivating investors by demonstrating to them your business’s value through a compelling/interesting narrative, you win half the battle.
And your chances for raising funding increase exponentially.
Quick summary of startup fundraising mistakes to avoid
Millions of startups around the world are competing to be the next Uber, the next AirBnB, or the next SpaceX.
As everyone is competing, angel and seed investors will only continue to grow and so will their investment criteria.
It is important that, as a founder, that you start getting your startup in shape by identifying mistakes that commonly lead startups to failure in their fundraising efforts.
If you want to stand out from the millions of startups, sell your potential investors the entire package.
- What is the idea behind your venture?
- Who is your team?
- What is your vision?
- Where do you see yourselves in a few years?
- What are your projections?
- What do you need to make it a reality?
Ideas can evolve or change. But when you earn the trust of the investor by showing them a passionate, honest, and self aware team, you have already won them over.
You are already someone they want to work with. That’s why Babak Nivi insists that investors do not just invest in a good idea but in the people behind it.
Your fundraising approach will have a huge impact on the ultimate survival and success of your startup.
You can learn a lot from the mistakes most commonly made by startups in their fundraising efforts as we have discussed. From these lessons you can harness the ability to attract the right investors for your startup.
They say, ‘A smart man learns from experience, but a wise man learns from the mistake of others’.
Raising money is not easy, but if you internalize the lessons in this article, you are already a step ahead of most startups, and that much closer to securing funding for you startup. Decide to heed and take action now!