Often, only the successful funding rounds hit the news. With the media hype that surrounds fundraising, it seems that raising money is something everybody can do!
However, there are many companies that don’t succeed in raising capital – and it’s primarily due to the following five funding mistakes.
Mistake #1: Raising too much money.
Especially for early-stage companies, raising money is a necessary step to be able to develop and grow a business. As “the more, the better” approach sounds attractive here, raising too much money is one of the biggest traps.
Besides the fact that it is simply unethical to raise more money than you need, it will cause problems later on. When you raise capital, investors want to see a detailed investment plan, clearly defining how you will spend this money.
If it took you more money than average to reach a certain point, stakeholders may become skeptical about your management skills. Moreover, the more money you raise, the more ownership you have to dole out to shareholders.
The art is to be creative and do the most with the least money. The more money you raise, the higher your stakeholders’ expectations will be.
Mistake #2: An unrealistic, high valuation.
You probably have read the headlines about the insanely high valuation of companies like Uber, Facebook and Snapchat. Facebook’s valuation topped $200 billion late last year, around the same time Snapchat fetched a $10 billion valuation and so on. These valuations are quite hard to understand. How can an app possibly be worth billions?
Getting a company valuation that is much higher than you expected might feel flattering, but is far from ideal if this valuation is set too high.
For instance, here at Equidam, with our business valuation technology, startups that are developing disruptive technologies sometimes get a very high valuation estimation. This is mainly because of the projected growth and revenues once the innovative technology is released. However, it’s tricky to fully rely on this number as there are many things that can change along the road.
We advise startups to not only look at the final number, but to look at the information behind it. This helps them better understand the inputs behind the valuation. Equidam’s valuation technology, for example, also accounts for qualitative information, like the experience of founders, the team and the country where a company is based.
Having an unrealistic valuation can harm your business in many ways. First, a high valuation sets high expectations. Moreover, when you start a second funding round, your current investors will want to see an increased value of their shares, which might be difficult to achieve.
The goal is to derive the most realistic picture of your company as possible, while showing your growth potential.
Mistake #3: Lacking investor benefits.
When pitching your business to investors, the most important part often gets lost. Prototypes, a business plan, a stunning slide deck… You try everything to impress potential investors. But, then you might forget about the most important aspect: your story.
Especially when your company is early-stage, and there is little track record to rely upon, investors are interested in the people behind the business. Communicating your passion, vision and goals helps investors assess business potential and the benefits they will get from investing.
For example, if you launch a crowdfunding campaign, make sure to clearly explain the benefits for backers. Only listing the cool features of your new technology or innovative product design, doesn’t tell backers why they should invest. Rather, explain why it benefits a potential backer, where you plan to be in 5 years and a behind-the-scenes look at the people that are making it happen.
Mistake #4: You think investors will knock down your door.
Raising capital requires strategic marketing, and a lot of networking. Even if your business gets exposure you’ll have to do the work and convince investors to invest.
For example, when seeking out angel investors, there are many businesses, like yours, ready to pitch. Investors are then left with many options. You’ll have to reach out to investors, as they won’t likely reach out to you. It takes a lot of dedication and effort to make your business stand out from the crowd.
Mistake #5: Taking the wrong financing route.
If you fail to close your funding round, it might be because you took the wrong financing route. First it was assumed that crowdfunding was only for startups, but now small to medium-sized businesses use the platform to raise capital.
While angel or VC investment will garner backing from experienced entrepreneurs, it also means you will hand over some of your equity and control. These are all factors you should consider when making a decision to pitch VC’s, angels, super angels, crowdfunding backers, or even family and friends.
Do your homework and consider all the options. Research how companies similar to yours have raised funds. Raising capital is a tough job, but when you’re prepared it can make all the difference in getting investors to sign on the dotted line.
This article has been edited and condensed.
Daisy de Vries is the Marketing & Communication manager at Equidam, an online value management tool for small businesses. Her passions are startups, writing and technologies. Keep investors up-to-date in a consistent and efficient way with the Equidam valuation report. The report gives a clear overview of the performance of your company and enables you and your capital providers to understand and manage the value of your business. Connect with @equidamtweets on Twitter.