Mistakes When Raising Capital

Picture this: you are running a startup and have been doing well up until this point. The metrics look good, sales are coming in, and your future projected growth is promising. Everything is rainbows and unicorns until you realize your burn rate is starting to catch up to you. Of course you’re going to need more money to stay afloat and keep the lights on, so you figure you’ll just go out and raise some money from a few venture capitalists or angel investors that you know have an interest.

In this scenario, which is almost always a great position to be in, you have a lot of important decisions to make and steps to take. Which investors should you go to? Should you accept a convertible note, or plan a Seed or Series A round? How do I prepare my pitch deck? While there are a seemingly abundant amount of action items to prepare for, there also mistakes you need to avoid leading up to and during your interactions with investors.

Being Ill-Prepared for the Meeting

This means coming to the fund-raising meeting with everything the investor could possibly need. If they ask for a business plan (probably less common now), go above and beyond with it. Never been to a meeting like this before? Gather information on what a typical meeting entails. Nervous about talking before investors? Practice your pitch deck at all hours of the day. You may not get another shot at an opportunity like this, so you absolutely have to prepare to crush it as if that were going to happen.

Not Asking for the Right Amount of Capital

Ask for too much capital and you may end up having to give up too much of your company for resources you don’t yet need. Ask for too little capital and you’ll have to raise another round and risk a down round valuation if things don’t go as planned. You need to find the balance of how much money you really need and for how long you plan to need it for. This is where knowing your financial metrics come to play. Think burn rate, customer acquisition costs, and lifetime value. These all have an impact on the bottom line.

Giving Up Too Much of Your Startup

Regardless of the round you are raising for, you are quite likely going to have to give up a piece of your pie to get your capital. In the beginning, you and any co-founders are going to be owning 100% of the equity, but as you raise subsequent rounds of financing, that percentage will continue to shrink. Depending on what type of investor you’re willing to meet with, they will want a certain chunk. VCs typically ask for 20%, but are willing to budge on that number depending upon the circumstances. Giving up too much shows greed on the investor’s side and heavily dilutes your shares. The one thing to note here is that founders shouldn’t think in terms of percentage they have left after all the funding – they should be thinking about the price per share they will receive as the company becomes more valuable.

Not Understanding How Investors Operate

Everybody has motives to act in their own best interests. The same goes for both the founders and the investors. Founders want to raise capital to keep their startup moving and growing and eventually becoming profitable. VCs work a little differently; they are looking to invest in the startups that give them the greatest probability of getting an X multiple return on their investment. This helps keep their LPs happy and eventually turn a profit with their fund. That doesn’t mean VCs are cold-blooded; most also enjoy helping founders get the capital and other resources needed to support the startup as well.

Not Knowing Your Industry

Being a founder means you have to know everything about the industry you’re trying to impact. That means you have to be attentive to detail about things like competitors, market trends, predictive behavior, customer feedback, weaknesses, strengths, blind spots, financials, and more. If you’re raising capital and you’re getting grilled about questions on the sector you’re in, and you don’t know the answer (or worse, you lie about it), that is a major red flag. Stay on top of everything that affects your startup as if it were your baby and you were living in the era of the caveman.

Avoiding the above mistakes won’t guarantee that you’ll successfully raise a round to boost your startup, but it definitely is a start. The ability to show that you’re a student of the industry you’re in, to prepare for any question or situation, and to become a great spokesperson for what you’ve built can certainly increase your chances.