Thanks to the mass media, a successful startup has become associated with a large volume of attracted investments, regardless of the stage of development of the project. However, blindly chasing investors is definitely not a top priority for any new venture. Moreover, focusing on fundraising, or approaching it from the wrong side, a large amount of time and effort can be wasted, which can harm a young company.
The purpose of this article is to help you avoid common mistakes in fundraising — after all, it’s cheaper to learn from other people’s mistakes than to step on the same rake as many startups before.
1. Don’t look for an investor if you don’t need it
As obvious as it may sound, many startups do not take this advice seriously. Let’s figure out what’s the matter here.
The vast majority of new enterprises are funded by the founders and they often remain the only investors in the project until the latter presents a new, in-demand product to the market, shows stable revenue growth, interest from buyers, and so on.
This happens for several reasons. The main one is that it is difficult to convince someone to give you a solid sum for an untested idea. In addition, most new enterprises (especially service companies) are not so capital-intensive, and it makes no sense for the founders to give a share in the company for a sum of money that they could actually generate on their own anyway. In other words, earlier attraction of external capital may simply not give the necessary impetus to development, but only dilute the share of the founders in the company.
We should also not forget that not all new enterprises can be scaled. Startup investors are chasing success, because many startups simply cannot achieve the growth rates required for a billion-dollar valuation in less than ten years.
What else you can do? The most optimal strategy will be to develop your business on your own, work out all the internal aspects of work, and only when you clearly realize your ceiling and understand WHY you need investments, you should look for an investor and attract financing.
2. Misunderstanding of the venture market ecosystem
Nevertheless, there are situations when companies due to the peculiarities of the industry or the novelty of technology need to attract large capital at an early stage of development in order to take a dominant position in the market in the future. And here some startups are faced with the fact that they do not understand which investor should be approached specifically in their situation. In the article devoted to the sources of financing at the early stage of the company’s development, various sources of financing are analyzed in detail, here we will give only a brief squeeze for a general understanding of the picture.
At the Pre-seed round, investors provide you with the means to test hypotheses, confirm the correctness of your own concept, search for a target audience and your business model. At this stage, the investor primarily looks at the team and the idea itself, which is the basis of the project. Investments at this stage are the most risky for an investor and therefore, for relatively little money, he will seek a good share in the company. However, it is this money that can become the starting point of the dizzying success of your startup.
Projects that have created the first version of the product, after conducting pilot sales and finding their business model, look much more attractive in the eyes of an investor. The so-called Seed round will help you make a leap from a startup to a successful business. As a rule, such early rounds of investments are usually provided by business angels, incubators, accelerators and early stage funds.
Round A aims to raise capital for the growth of a startup after the company has entered the market and confirmed its hypotheses with real figures. At this stage, much stricter requirements are being put forward for the project from investors. Profitability and positive dynamics are expected from the project in many indicators.
Trying to attract investors of stage A or higher (for example, venture funds) before your business starts to make a profit and gets back on its feet is, in my opinion, a waste of time for both sides. And here we will not give an example of projects that are planned to be unprofitable.
3. Attempts to attract “cold” investors
Many funds write on their websites that they rarely take strartups who write cold letters into account. Although it may seem unfair, in the end, investing in a startup requires a large share of trust in the founder.
Because of this, the best way to effectively raise money is to actively get involved in the local startup community and find people who will vouch for you and introduce you to investors who can meet your goals and interests.
However, this does not mean that you should not apply for incubators and accelerators with an open application process.
4. Inability to communicate your ideas clearly
Finally, after you are convinced that you really need an investor and that your business is at the right stage to have a real chance of attracting them, you need to make sure that you can state your vision of the future as clearly as possible.
To do this, you need to understand your investor very well:
First, does your company match the investment profile of the investor you are attracting?
Secondly, can you briefly and clearly tell about your company and investment potential?
And last but not least, the 5th mistake is the lack of empirical evidence of your statements and the information that you disclose in the materials for investors.
Thus, attracting investments is not an easy process, but the main difficulties are related to the fact that companies are trying to raise capital at the wrong time or in the wrong place. Make sure that you do not do this, and with some effort, you will multiply your chances of a successful investment round.
