Have you recently read that your competitor or a startup you’re following raised big funding round? Do you sometimes stressfully wonder why is that not happening with your startup? Remember none of those success stories came overnight. Mistakes are bound to happen in whatever endeavor you undertake as an entrepreneur, given there is so much ambiguity you are dealing with. The good news is that you can learn from others’ mistakes to make your fund-raising efforts easier. So, let’s jump right in and hear excerpts from an interview with Mark Taylor about the 10 common mistakes he sees entrepreneurs make in raising funds for their startup.
1. Not planning the fundraising well in advance: Pushing fundraising to the last minute is not a good strategy. There isn’t a hard number about how long it takes to raise funds, but even in a best case scenario, it can take up to 6 months or more from the time you start your fundraising efforts till the time you have the money in your account. So, start early to make sure you don’t run out of money.
2. Trying to raise investments before you are fully prepared: Entrepreneurs sometime aren’t prepared enough when they start fundraising. There is no one right time for a startup to raise funds from angel investors. It depends on many factors including the industry, company stage, proof points to date and more. If you are past the “family and friends” phase of financing and feel you are ready to pitch to angel investors make sure you are prepared with the following:
Problem - a clear definition of the problem you are solving
Solution - how your solution uniquely solves that problem with evidence to support that claim
Market - addressable target market definition and sizing
Competition – competitors and how you are different
Business Model – how will you go to market and make money
Traction – progress to date
Team – who will do what, individual backgrounds and why this team is capable of making the startup successful
Financial Projections - financial pro formas
Deal Terms - amount you are seeking to raise, structure of round (i.e. preferred stock, convertible note), prior funding
3. Waiting too long to enter the market: If it’s possible to get actual in-market experience you’re your product or service before fundraising that is optimal. In certain cases, delaying fundraising until a startup is in the market and generating revenue can put you in a better position during pitches with investors as it shows true market response to your product. However, sometimes entrepreneurs wait to enter the market until they have the “perfect” product or the perfect business plan. Avoid this if you can. It might give investors reason to doubt the entrepreneur’s capabilities to run or successfully scale the startup. If possible go out and test the product with your customers, iterate, and keep things moving.
4. Dropping countless emails to investors: Many times, inexperienced entrepreneurs use unsolicited emails in an attempt to connect with angel investors. Entrepreneurs need to understand that angel investors receive hundreds of unsolicited emails monthly. Even if your idea is good, it is bound to get lost in the crowd. However, if your email come from a trusted referral or from the investor’s personal network there’s a much higher chances that your startup will be considered.
Now you may be wondering what if I don’t have a connection to network to investors? Don’t worry…even if you don’t, there are many ways to develop such network. For instance, engage with target investors on social media or attend angel investor attended conferences/events. Many times, investment groups like the Alliance of Angels organize workshops or conduct office hours to help entrepreneurs, something that can directly put you in front of angel investors. When you have those opportunities don’t be shy…be prepared with your 30 second elevator pitch and an ask like “Can you recommend other angel investors who might be interested in learning about my startup?” and then follow-up using that referral to gain entrée to the potential investor. And then ask those investors the same question to continue broadening out your referral campaign. So rather than sitting home and dropping countless emails in the hope that one of your email will be read, go out and network.
5. Assuming that the investor knows your market and understands the problem you are trying to solve: Sometime entrepreneurs are so involved in their startup that they lose sight that the investor might not be aware of the industry, technology, or the problem itself that they are trying to solve. Without this understanding, it is very difficult for the investor to evaluate your proposal. Therefore, it’s extremely important that you establish a common understanding of the industry, opportunity size, and the problem that you are trying to address, before proposing a solution and business model during your pitch.
6. Neglecting the importance of practicing the pitch and gathering feedback: Entrepreneurs know their customers and how they are solving the problems of these customers. If they have all the time, probably many of them will be able to convey their stories (effectively). But in most scenarios where you are presenting to a group of investors, your pitch is constrained to a time-limited format (i.e. 10 minutes for presentation, 5 minutes for Q & A). Entrepreneurs in many such cases fail to tell their stories succinctly. You only get one chance to make a first impression. It’s really tough to get a second chance to pitch for the same round to investors so you need to make that first pitch great. Build a first draft, rehearse it, get feedback from advisors/investors you know and make it as strong as possible. I can’t emphasize this too much…before going for that pitch, practice, practice, and practice. Find people who can ask you tough questions regarding your assumptions and give you honest feedback.
7. Spending too much time, establishing credibility: Sometimes an entrepreneur spends too much time in the pitch talking about themselves to establish credibility. Remember your time is limited so you need to quickly establish yourself but more importantly you need to sell your idea and convince them to give you the capital you need to take your startup to the next level. So, keep the introduction strong, but keep it brief.
8. Not able to define good deal terms: It is one of the most crucial bottlenecks in the fundraising efforts. Even if everything goes great in the presentation, deal terms that are outside of the norms can keep your deal from closing...and in some cases interested investors will see this as a sign of inexperience and just walk away.
So what are “good deal terms”? It starts with both sides embrace the philosophy that when the company achieves all the milestones discussed in the presentation, both parties - entrepreneur and investors - will win together. Deal terms should be fair and motivating for both sides. It is reasonable for entrepreneurs to be aware of equity dilution in the earlier stage of the company because ownership is what motivates you to achieve those milestones. However, it is also important to understand that with more than 90% failure rate, investor’s capital is always at huge risk. Therefore, too conservative deal terms aren’t encouraging enough for the investor to invest their time and money.
One of the best ways to construct good deal terms is to look at the past fund-raising history of startups in your category and in your geography. Experienced advisors, knowledgeable angel investors and startup attorneys are good sources for this. Starting with those reference points, you can better determine and justify your deal structure and valuation. This will make it significantly easier to get to alignment on terms with investors.
9. Lack of thought put in financial projections: Let’s all agree that it can be challenging to create accurate financial projections, given so much uncertainty at this early stage of your company. So think of this as both an art and a science…and remember that financial projections that are too conservative or too aggressive can alarm investors. However, well thought out three year financial projections with clearly stated assumptions can demonstrates the entrepreneur’s understanding of their market, customers, product roadmap and go-to-market strategy to investors. The best financial projections make informed assumptions regarding potential revenue, partnerships, resources requirements, and profits. If the investors trust your projections and believe that their funding can help you achieve those milestones, you are much likely to raise funding from them.
10. Lack of clarity over business model: It is practically impossible to design a robust business plan in the first go, especially when you are still in the process of figuring out product-to-market fit. However, sometimes entrepreneurs make basic mistakes like calling a service business a “product” or “SaaS business”, trying to show that the business is scalable and does not require a huge service component. In some cases, this might be true in a distant future but isn’t the case today. This happens because either entrepreneurs aren’t clear themselves or they are trying to hide something from the investor, both of which do not go in the entrepreneur’s favor if discovered later. And trust me, such issues are easily identified later in the due diligence process. Therefore, the entrepreneur should develop some fundamental understanding of what the business model is and try to communicate it to the investor as honestly as possible. Showing a roadmap that demonstrates how the service heavy business will convert into just a product or SaaS model could be one of the ways of avoiding this pitfall.
To summarize, by learning from the above mistakes we’ve seen many entrepreneurs make and with appropriate amount of preparation, you can significantly improve your chance of raising funds and well within your timelines.
Mark Taylor is an active angel investor and retired engineering professional. He is a Board member of the Alliance of Angels, the largest angel group in the Pacific Northwest. Mark has seen hundreds of entrepreneur fundraising pitches – the good, the bad and the ugly. Mark’s professional background is in telecommunications networks, wireless communications systems and distributed systems.
The Alliance of Angels (AoA) is the largest angel group in the PNW with 160+ members. AoA members provide invaluable business support and connections to help our portfolio companies succeed. To learn more about the Alliance of Angels go to https://www.allianceofangels.com