In recent times, early-stage funding has become increasingly difficult to come by as compared to earlier days. You must know that the seed funding market seems to have collapsed as seed deals have dipped by almost 50 percent since 2014 as per some expert estimates. Today, venture capitalists are more interested in diverting funds into the later-stage financial deals. This would be leaving the startups in their initial stages struggling to grab the attention of investors and lenders. You could easily draw the attention of potential investors if you avoid the mistakes made by many of your peers. If you could steer clear of these common funding mistakes, you could easily raise early-stage capital and stay well-funded and way ahead of the curve.
Mistake: Your Team Equation Is Not Right
In the initial stages of your business, it is actually, more about investing in a specific team. Investors are more interested in seeing a dedicated leadership team which is capable of implementing and articulating a great vision. So ideally, it is best to have a brilliant founder having complementary skill sets. He must possess a brilliant track record of successfully working together as a team.
However, founders must necessarily keep in mind that your lenders or investors may wish to meet the entire team right from the very beginning instead, of offering you the support while you are still assembling the dream team. Your team must demonstrate a degree of understanding and cohesiveness. Your entire team must be prepared to speak confidently and have knowledge regarding the company vision, objectives, and the roles each one of them has, instead of relying entirely on you.
Mistake: You Are Not Adequately Prepared
Do a thorough research on investors and find out their priorities. That would help you in speaking about how effectively your organization could fit into their specific portfolio. You need to be punctual and respond promptly to calls and emails. These are some of the fundamentals of a trustworthy business. Do not fumble on these counts as that would give a poor impression of your company. Finally, you must be prepared with all the relevant data and information that would be required by an institutional investor for reviewing while making the final funding decision.
Mistake: You Are Not Utilizing GAAP
GAAP implies ‘Generally Accepted Accounting Principles’. You must keep track of all your money whether coming in or going out. Utilizing GAAP standards would mean that you have a competent and trustworthy accounting information on which crucial financial decisions could be based. In this context, you must understand that GAAP statements are vital to investors.
Mistake: You Have No Clear-Cut Funding Goals
If you are looking for an investment, it is compulsory for you to know precisely how much capital would be required by your business. This is the most important aspect of the loan process but many inexperienced business owners do not have clear-cut business aspirations or funding goals. You must know exactly how much capital is required for your company. Numerous companies ignore this vital step as such they are often in deep trouble as they do not obtain funding assistance easily. You must calculate meticulously the amount of capital needed for hitting your milestone right from fundamental professional services to the operational costs.
Mistake: You Are Seeking Financial Assistance Too Early
Do not be in a haste for raising money. If you are too quick for raising the capital, things could go wrong and experts consider it as a major funding mistake to avoid. Bootstrapping seems to be a viable choice for numerous companies. The faster you sell equity, it would be costing you more in terms of loss of dilution and loss of leverage. Early funding is definitely a poor move. Get in touch with Liberty Lending for perfect funding solutions.
Mistake: You Are Not Presenting Any Cash-Flow Analysis
Potential lenders and investors are very much interested to make sure that you have a sound understanding of the cash flow and exactly how you would be spending their funds. It is best to carefully keep track of all your cash in, as well as, cash out. You may use these realistic numbers as the real foundation for all your business solutions and decisions.
Mistake: Your Seem To Be Overestimating Your Future Revenue
It is important to provide realistic financial projections. Though a top-down financial prediction could be pretty inspirational, it is certainly a useless way of creating unrealistic numbers. Even though some lenders would be interested in seeing this, you must essentially back it up with a reliable and substantial bottom-up prediction.
Mistake: Underestimating the Variable Expenses Involved
You could state your fixed expenses at once but variable expenses would be varying as per your precise level of business interaction and activity. You cannot simply account for all your variable expenses, however, you could successfully identify some of your key variables. So you must consider them and factor them strategically into your final calculations.
Mistake: The Size of the Market Is Too Small
Institutional investors have their preferred investment ranges and they are not comfortable in operating below or above these limits. If you are looking to attracting investments of a particular size, you should find out for yourself whether your business has the potential to qualify for that kind of investor interest. You can undertake a market-sizing analysis in two ways; bottom-up or top-down. Entrepreneurs prefer performing top-down analyses because they are easier; however, investors favor bottom-up analyses since they are more realistic even though they can be complicated.
Mistake: There Are Problems in the Ownership Structure
Every investor wants to verify that the founders, as well as the key managers of the startup, are fully motivated financially so that the business enterprise is more likely to succeed. For that to happen, it is important that the capitalization table representing the ownership structure of the startup demonstrates a commitment to the shared goal. Investors normally become wary when they see that even during the seed stage, the founders do not have a majority stake in the business or the majority shareholders are not involved in the business operation. An additional red flag is a very crowded cap table that makes it seem that the founders of the business are being extremely liberal in dishing out shares in the company; too many shares given to advisers does not reflect prudence on the part of the founders. At all times, the founders should be seen as making properly thought-out decisions regarding adding, removing, and incentivizing employees.
Conclusion: Stop Pitching To Investors with the Wrong Profile
Just because you are completely gung-ho about the prospects of your startup, it does not automatically mean that venture capitalists will be equally enthusiastic. You should understand very clearly that VCs would only be interested in businesses that have a very high growth and profitability potential; typically, they will expect a return of ten times their investment in a period of five to seven years at the maximum. It is also very important that you make pitches to the investors who are more likely to be interested in investing in the space that your business operates. Besides the industry, VCs also consider factors like the stage of the company, the business model, and the profile of the returns to qualify their investments. A proper analysis of the investor profile will prevent you from wasting your own time as well as that of the investor.