Mistakes to Avoid When Raising Capital for your Startup

If you have a brilliant idea that you’d like to turn into a successful business, you’re going to need to raise capital. Your ability to raise capital is a strong indicator for how successful your startup will be. This can set your startup up for huge success or cut its growth short. Here are some mistakes to avoid when raising capital so you can get started on the right foot.

1. Not understanding what investors want to know

Your main goal is to convince investors to fund your startup, so it’s essential that you understand what investors want to know. Put yourself in their shoes and think about what their concerns would be. How profitable will the business be? Do you or your team members have the skills and experiences to manage the business effectively? What will happen to investors’ money if things go south?

Make sure that you are prepared to answer the tricky questions and be transparent about any risks to build trust with your investors.

Some aspects to address include:

  • Demand – what is the demand for your product now and what will it be in the future? Take into account the impact of any disruptive technologies and analyse emerging trends.
  • Scalability – will your business continue to grow? Can you sell your product or service on a mass scale?
  • Business plan – what are the steps you will take at each milestone of growth for your business? This can include hiring more employees, increasing marketing and expanding product lines.
  • Risks – will it take years before returns are high? Could consumer interest flatline after the first few years?
  • Forecasts – how large do you expect your business to be in 2, 5 and 10 years?
  • Exit strategy – what options will investors have if things go wrong and the startup fails? While this is not something you may wish to address, investors will be highly interested in this. Make sure you have reasonable options available to them.

2. Poor Timing

It’s important to begin fundraising at the right time. If you begin seeking out investments before the product is finalised or tested on the market, this may make investors hesitant to invest. You should show that your startup is developing a solid customer base, making revenue and is able to grow. You should also have a clear financial model for how much money you need to take your business to the next milestone and expand. Having the proof, the figures and the plan to backup your pitch to investors will make you a lot more credible, instead of pitching nothing more than an idea.

However, raising capital can take months, so you don’t want to start approaching investors too late either. If you’ve already spent a lot of your own money and effort developing your product, you would need the money to come in soon so you can continue operating. Notably, the time and effort it takes to win over investors is substantial. You will need to attend networking events, set up countless meetings and make presentations over and over again. Medium recommends setting aside at least 6 months before your next milestone for capital raising, which could take up to 9 or 12 months.

3. Not asking for the right amount of money

You don’t want to ask for too little or too much money. If you fail to raise enough money, you may be unable to expand your business and cover any unexpected costs that may arise when attempting to reach your next milestone. However, if you manage to get very substantial investments for your startup, your investors are going to want to have more say in your business. You will be subject to more scrutiny and control by those who’ve bet a lot on your success. It’s therefore important to raise the right amount of money, so that you can remain in control without running out of funds.

Figures you should consider to determine how much money you should raise are the following:

  • Cost of achieving the next milestone: what costs are involved in expanding your business?  You will probably hire more people, spend more money on marketing and increase production. Make sure you do all the maths to figure out a reliable estimation of these costs plus a generous buffer to account for unexpected costs. You don’t want to go back to your investors to ask for a bailout if your business goes awry.
  • Monthly burn rate: how much money will you be using up every month to get to your next milestone? This will allow you to determine how long this round of investments will last you, and when you need to plan for the next round.

4. Poor Presentation

First impressions are always important, and this is particularly so for entrepreneurs. When you are pitching to investors, you are standing up there in front of highly knowledgeable and commercially astute people, asking them to believe in you and  give you large amounts of money. You need to convey confidence, trustworthiness and expertise. Make sure your presentation skills are excellent. Also, don’t try to spend as little as you can on marketing and presentation materials. Your pitch deck and Powerpoint presentation should look immaculate and highly professional.

5. Not having a lawyer

During negotiations and closing of investment deals, you should have a capital raising lawyer with you. You want to make sure that the legal rights between you and the investor are clearly defined and balanced. If the deal falls apart or your startup fails, you don’t want to bear all the losses. Investors may also sneak in clauses in the contract that are highly disadvantageous to you. So make sure you get yourself a capital raising lawyer.

Conclusion

Capital raising is a highly crucial step in expanding your business. If done right, you could have the resources to build a wildly successful business. If you make some of these mistakes however, your business could fizzle out. Make sure you avoid making these mistakes and set your startup onto the path of success.

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