15 Common Mistakes Founders Make When Raising Capital and How to Avoid Them
Having spent over a decade as an investor hearing pitches from almost a thousand founders, I’ve been fortunate to come across many founders who are amazing visionaires with a real penchant for identifying opportunities and then pouncing on them.
However, when it comes to raising capital, that visionary ability often doesn’t serve them as well. So what should they do? Below are 15 common mistakes that founders make when attempting to raise and what they can do to avoid them…
1. Thinking you can “sell” your way into a deal.
When you do this, you come off looking like a rookie. It’s also evident that you don’t necessarily “get” it. Keep in mind that investors see and hear pitches every day and can see through the spin. Or they will simply wait until they see the numbers to see the business objectively. What to do? Keep to the facts and be authentic. Imagine if you were on the other side of the table (or zoom chat) and think about what you would want to know.
2. Misunderstanding your numbers.
This is not terribly unusual, but if you’re messing up your numbers, what else don’t you understand. While clearly this is a data-driven process, the investor also needs to feel confident in you or you will risk losing interest from certain investors.
What to do? Make sure to find someone who understands how investors see your financials, and learn from them.
3. Underestimating your value.
If your business is investable but you’re not seeing that, then investors will salivate. To use a predator metaphor, you’re easy prey and they’re “licking their chops”. You can also put the deal at risk because they can get confused or incorrectly anchored. What to do? Know your value! Find someone who understands & is willing to give you the objective feedback. And ask for the feedback!
4. Overestimating your value.
This is often off-putting. It gives the investor an “easy no” – which they are looking for. What to do? Again, know your value! A founder is always going to be biased as their harshest critic or by being blinded by optimism. Like with underestimating value, find and ask that objective someone who understands the startup environment for the feedback. If you have to be wrong one way, it’s better to under-estimate than it is to over-estimate.
5. Not being able to “zoom out”.
It may sound counter-intuitive, but can you be effectively succinct when being queried about your business and its reason to exist without getting too far into the weeds? If you can’t, it can be exhausting for you and the investor – the investor won’t understand the business, and you’ll get frustrated by their lack of understanding. What to do? Let the investor lead the conversation. Never speak longer than 30-45 seconds, otherwise you risk droning on too long. If the investor is looking for more details, they will drill down. Keep in mind, nobody will know your business better than you. Use that confidence to fuel your answers.
6. Not listening to feedback (explicit or implicit)
You are an under-resourced, disadvantaged startup – feedback from investors and advisors will be one of the most valuable assets you have. While you definitely have some of the answers, no founder has all of them. The bad founders tend to be the ones who think they have all of them. What to do? If you’re fortunate enough to be getting feedback of any kind, use it! Input from folks that have been there, done that is one of the most valuable resources available to a founder. Do not hesitate to take advantage of it.
7. Underestimating your odds of success.
You can waste a lot of time talking to dozens of investors when you only truly need to talk to a few – valuable time that could be spent building your business. What to do? Determine whether you are investable (see above) and act on that. If you are not investable, no investor will put in their money until your numbers and profile say you are. However, if you are investable right now, then make sure you’re telling the right story and presenting your business in the appropriate way.
8. Overestimating your odds of success.
You look overconfident and can risk your cashflow and your business if you cut it too close. What to do? Be careful. If you need the cash, you need to be sure that you can get it. Once again, understand how investable your business is and plan accordingly. Possibly explore other funding alternatives that are non-dilutive.
9. Misunderstanding the game
Investors know what they want and similar to overselling, you’re going to lose if you don’t know their game.
What to do? Learn what game they are playing. Why they are looking to invest, and on what criteria. For instance, do they prefer to only invest in $10MM+ ARR SaaS businesses with at least X% annual growth in the edtech sector? If you’re an edtech provider, make sure you check those other boxes.
10. Being underprepared to close the transaction.
Getting to the closing wire takes time which is generally months of work if not more. You’ll be exhausted and will risk the deal. Or, you will settle for a bad one. What to do? Get your business and your personal life in order before you sign the LOI. It will be busy. Ideally, get some subjective-for-you help to at least take care of all of the data requests in those months prior to closing.
11. Talking about what you will do vs. what you have done
Investors don’t care, almost at all, about what you say you will do. What have you done in the business to date? What have you done prior to this business? What to do? Talk about the numbers & progress that the business has shown to-date. If there’s not much to show there, talk about your accomplishments before this business and how they now apply. However, while having a solid plan for future growth is good, don’t try to sell future numbers. They aren’t real and investors know that.
12. Thinking if you got 100 no’s, there is hope for the 101st meeting
Umm, no. You’re wasting way too much time. While you may have a fundamentally sound business, something is simply awry and investors aren’t going to be particularly forthright in telling you exactly that. What to do? Seek out some independent counsel who can give you that objective feedback. And then use that and whatever feedback you got with those 100 no’s and get back to focusing on your business. If you have product-market fit, then it may simply boil down to executing and getting to the profile that investors do covet.
13. Talking to the wrong investors.
Like a bad marketing plan, if you’re targeting the wrong audience, you’re wasting way too much time. What to do? Understand what investors are looking for. Are they sector-specific? Consumer-driven investments? If you’re not it, then don’t speak to them (not a good use of time.)
14. Taking things personally or getting offended by Q&A.
I know, it’s hard not to get frustrated when it seems like an investor simply doesn’t get it. But you end up looking weak and you shoot yourself in the foot. What to do? Raising capital makes you inherently vulnerable and it is okay to feel that way. What is not okay is to lose your emotional control, be defensive and find negative intent in the investors. Keep in mind that they are doing their job too (to protect their investor’s money.)
15. Not being specific enough with your plans/capital needs.
Investors see an opportunity in your business based on the metrics, but they don’t really know the specifics that will drive your business to the next level. What to do? Guide a thirsty horse to water. Be prepared to walk through what you need and how you plan to use their investment to scale, expand, optimize or whatever long-term goal needs achieving.