Thanks in large part to business and startup media, a successful startup has become synonymous with a well funded startup even it hasn’t yet developed a proven product. Yet, blindly chasing after investors is most definitely not the first order of business for any new venture.
Focusing on fundraising when you shouldn’t or approaching it from the wrong direction might easily result in a lot of lost time and effort, which can be crippling for a new business.
The goal of this article is to help you avoid the common fundraising pitfalls – after all, the best way to learn is from the mistakes of others.
1. Thinking That You Need An Investor When You Don’t
The vast majority of new businesses are bootstrapped – i.e. financed from the founders. This happens because of three major reasons:
First, it’s hard to convince someone to give you a substantial sum for an unproven idea.
Second, most new businesses (especially service companies) are not that capital-intensive and it doesn’t make sense for the founders to give a percentage of their earnings in perpetuity for a sum of money that they could realistically scrape together anyway.
Third and most importantly for startups – not all new businesses are scalable. Startup investors are chasing home runs. Most traditional businesses simply cannot reach the growth percentages required for a billion-dollar valuation in less than a decade.
2. Trying To Raise Money Too Early
Arguably the most common mistake new startup founders make is to try to fundraise with an idea written on a sheet of paper and nothing more to show for it. While this is possible if you are well connected and have an impressive resume, it’s becoming harder and harder nowadays. More investors are relying much less on the ability of founders (or the investor’s own ability) to predict the future and more on solid, empirical evidence.
It’s the founder’s job to validate their idea before they fundraise. This way they can include real data in their pitch.
3. Misunderstanding the Fundraising Environment
Pre-seed and seed rounds provide you with capital to find proof of concept. To develop your startup product and find your first customers so that you can be certain you’re on the right track to product-market fit. Pre-seed and seed rounds are usually provided by angel investors, incubators, accelerators, and early-stage funds.
The venture capital rounds (A, B, C, etc.) provide growth capital to startups post-product-market fit so that they can scale up their operations as fast as possible.
Trying to pitch mid and late-stage investors (i.a. VCs) before your business is making money is a waste of time for both parties.
4. Trying To Reach Investors Without Referrals
A lot of startup funds write in plain text on their website that they rarely take into account cold outreach. While this may seem unfair, at the end of the day investing in a startup involves a large dose of trust in the founder.
Because of this, the best way to fundraise effectively is to actively involve yourself in your local startup community and in time to find people who would vouch for you and introduce you to investors that could match your goals and interests.
That said, this doesn’t mean you shouldn’t apply for incubators and accelerators with an open application process.
5. Failing To Communicate Your Ideas Clearly
Finally, after you are certain that you actually need capital and that your business is at the right stage to have a realistic chance to get it, you need to make sure you’re able to communicate as clearly as possible your vision for the future.
This requires you to understand very well your audience:
First, why does your company fit the investment profile of the people you are pitching?
Second, can you succinctly and clearly communicate what your company is actually doing (and why)?
And last but not least, can you provide good empirical evidence of your claims?
In summary, fundraising is hard, but it’s mostly hard because the wrong businesses are trying to chase investments at the wrong time. Make sure you’re not doing that, and with some effort and consistency you should increase your chances to attract investor interest exponentially.