10 Common Mistakes To Avoid When Raising Funds For A Startup

Posted by Elisabetta Ferri on Jun 28, 2021 08:08: AM
Elisabetta Ferri

Focusing on raising funds when it's not yet needed or approaching it from the wrong direction might result in a lot of lost time and effort, which can be crippling for a new business. 

According to The Telegraph, there are approximately 660,000 new startups registered in the UK every year. 

Unfortunately, not all of them will make it.

29% of startups failed because they ran out of cash.

So, if you don't want to be in the 29% of startups that fail to attract outside funding, you must avoid certain fundraising mistakes.

However, the difficulty is that entrepreneurs only realise their errors after making them and have been rejected.

But don't fret. This guide will help you avoid the common fundraising pitfalls.

10 Common Mistakes To Avoid When Raising Funds For A Startup

 

1. Raising Too Much or Too Little Money

One funding mistake is raising too much or too little money.

If you raise too little money, you won't be able to pay for the resources that will allow your firm to grow, and it will also be challenging to hire and retain excellent employees.

Every day, a business has expenses, so if you haven't raised enough money or your company isn't making enough yet, your business will run out of money, and you'll have no choice but to pack and leave.

Raising too much money, on the other hand, can also be problematic.

Founders will also face more investor pressure. When an investor gives you several million pounds, there is an expectation that the money will be put to work right away, rather than sitting in a bank account while the founders take their time.

To avoid making these mistakes, ask for a little more than you think you'll need, but not too much, so you'll have a safety net in case of emergencies or unexpected delays or costs. Be realistic about the number of funds you need and aim for just above that figure.

2. Giving Up Too Much Of The Company

Giving up too much ownership in your company when raising funds is one of the worst errors you can make.

While a deal that includes a significant piece of your business may appear to be a brilliant idea at the time, it may end up costing you far more in the long run. Attempt to keep firm ownership and raise or access finances in any other ways.

3. Having No Plan For Scaling

Plan the process of scaling up well in advance. Begin meeting with investors, securing deals, and formulating a sound strategy.

Nothing scales automatically as your company grows unless it's methodically built up for growth. To stay up with the pace and make the most of your company's momentum, you'll need the necessary infrastructure in place — systems, procedures, and physical space.

4. Raising Funds Too Early

Funding your startup too early (or too late) is horrible for your company.

For value, market, and team, timing is everything. Consider when is the right time to raise funds. Give yourself six to eight months to raise every time. It isn't something that happens overnight.

Most startups are "too early" because they haven't done the essential validation work to reduce investment risk.

Make sure you've gone through all of the significant assumptions that underlie your business model and that you're ready before you apply for funding.

5. Failing To Research Investors

When it comes to investors, research is a must. Make sure you're pitching to investors who have funded businesses similar to yours in terms of size, stage, and business model. 

Founders who understand how their companies fit within an investor's more extensive portfolio and use that information to reinforce their case will be more successful in the long run than those who focus solely on the prospective returns of their own company.

Before meeting with investors, you should also consider all possible questions and requests.

If you're unsure what types of questions, documents, or data investors are looking for, find a mentor who can help you out.

If you're prepared with this information and requests from investors are answered quickly, it demonstrates that your company is ready to move forward.

Make sure you can explain why your team is strong, why you're experts in the field, and why investors should trust you with their money.

6. Being Underprepared

Many entrepreneurs begin their fundraising efforts with much enthusiasm but with unrealistic expectations and inadequate planning.

Many also underestimate the length of time it takes to complete a round of investment. They believe it will just take a few months, whereas, in reality, it will take a few months merely to prepare, followed by another six months (or more) to finish the fundraising.

While you must instil confidence in your potential investors, you won't be able to do so if you're not prepared.

Do your research, create a strong pitch deck and have the capacity to answer tough questions, even if it means revealing to them the aspects of your organisation that need development. 

The more you know your industry, business model, risks, and potential rewards, the more likely you will appear credible to a potential investor. 

7. Ignoring The Need For A Contingency Plan

Even if you believe you're in a solid position to raise funds, investors may disagree. When negotiating, having not just a Plan B but even a plan C or D will assist you in gaining an advantage. Having these alternative routes can aid you in negotiating conditions and dictating timing.

8. Asking For Investment At First Interaction

If your first interaction with an investor extends your hand and asks for money, you’re at a significant disadvantage.

Start right by networking as soon as you can. Make the most of your existing connections and contacts to acquire introductions to possible investors or people who can help you make those introductions. Inquire for information or advice.

Most investors love helping founders and will gladly give you some time and attention. Follow up with them and let them know how you're doing. When it's time to raise your next round, you'll have a team of angels or venture capitalists who know you, your startup, and have a warm feeling for you.

9. Not Asking For Enough

Founders frequently request less funding than they require.

Ensure the amount you're asking for is backed up by realistic financial projections and a solid business plan. Don't worry about scaring off investors by asking for a large amount of money, as long as you're honest about your company's projected profitability and risk profile.

If you're not sure how much to ask, consult a financial advisor or a mentor. Keep in mind that some VCs will offer you a low valuation to test whether you dare to ask for more. This is where market research for investors comes into play. If you find yourself dealing with one of these investors, don't hesitate to negotiate the valuation.

10. Not Seeking Professional Advice

When raising funds for your startup, it's essential to seek professional advice to understand your funding needs and expectations better.

In some cases, more experienced and qualified persons may be able to provide sound and valuable advice. They will frequently reveal their failures and hard times, and you can learn from this to improve your entrepreneurial journey.

Also, never be afraid of saying you don't know or understand something and asking for help. 

Little snippets of advice and motivation can go a long way in assisting you, especially if you're getting started raising funds for your startup.

Summary

Trying to secure funding, especially if you're a first-time entrepreneur, can be intimidating, stressful, and time-consuming.

As a newcomer to fundraising, there will be a learning curve, so you shouldn't be afraid to make mistakes.

However, you can avoid some of those mistakes by learning from other founders.

By knowing about the ten common startup funding mistakes discussed above, you can now avoid making them.

However, if you still have any questions regarding your startup, you can contact us by scheduling an appointment with us today.

Rest assured that someone will get in touch with you to answer all your questions.