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The initial funding stages for a startup can be exciting, frustrating and drudgery -- all in equal measure. But what entrepreneurs need to keep in mind is that what happens during those early stages can have a big impact on the company’s ability to mature and secure additional funding further down the road. So it is imperative to prepare the startup for success from the beginning. There's no step-by-step methodology for developing a startup funding plan. Each startup is unique, both in the ideas they present and in the promises that they make to customers or to their investors.
However, in fundraising, it's not the customers' input that matters most. What’s vital is what potential investors think of the company. A startup's fundraising efforts hinge on its ability to make itself and its business ideas attractive. With that in mind, here are seven common mistakes entrepreneurs get caught up in during the early funding rounds. Learning how to avoid these can make later rounds of funding go much more smoothly.
1. Lack of professional assistance:
When raising funds for a startup, it’s critically important to seek the advice of professionals to better understand funding needs and requirements, moreover, professional assistance is required in order to understand the procedure one should follow while going for the fundraise. Consulting a professional with adequate experience can help to achieve the desired results without making any mistakes.
2. Fundraise without a deck:
A deck is something one needs to send to potential investors that includes all the basic information about the startup. In short, a pitch deck helps the investors to understand the business idea, concepts and its future plan. So, it’s always preferable to have a promising deck because this is the first thing investor’s demand while entering into the Fundraise discussion. A Startup probably needs investors more than investors need a startup. So, it's better to play by their rules.
Many startups think that their product is so good that investors won’t need a deck! Others might think the investors should just trust them, so it’s not necessary. But, It’s a big no.
3. Obsessing over the stake:
Entrepreneurs are overly focused on getting the maximum percentage of ownership of their companies. And there is a reason that they don’t want to give away too much of the company they spent many sleepless nights building. But focusing too much on dilution is a huge mistake. It’s far better to own slightly less percentage-wise in exchange for better terms or better partners.
The fact is, even if founder owns 90% of the company, they still might not have control of the board or voting rights depending on how it’s structured—and they could lose control over the company. Percentage of ownership matters, but it matters much less than most entrepreneurs think.
Choosing investors based on dilution alone is not the right method. One should pick someone who can contribute to the business tremendously in every aspect because most of the time apart from investing a huge amount into the company investors acts as a mentor to the Founder so they can make sound decisions.
4. Not being selective about the investors:
A lot of entrepreneurs are impressed by VCs with fancy resumes. This is one of the biggest startup funding mistakes. A general rule is the fewer investors, the better. Managing a large cap table can be troublesome when everyone may have different demand and expectations which makes things difficult to handle.
Institutional investors can be great. They can also be high maintenance. Alternatively, small or individual investors may be more agile but can require time-consuming hand-holding.
Always do a research and prepare a list of investors because it’s not only about the funding it’s about making the brand a hit and this can be achieved with the help of experienced investors in the related field or who possesses a sound knowledge of the similar business line. Then, jump on a call and do the due diligence.
5. Having no plans for scaling:
A business without a plan isn’t a business. Where do you see the company five years from now? What financial plans you have? These are important questions to ponder upon. An incomplete or no business plan may create a problem. It is always preferable to have a sound business plan. And having a business plan not only helps in fundraising process but it provides a clear picture of the financial planning of the business.
6. Not paying enough attention to valuation:
Lack of professional advice from valuers or advisors is likely to value business inaccurately, which will prove to be a roadblock in getting funding.
A high valuation may seem a good route to take early on, but it could be setting up for problems later. High valuations early on may set expectations for ensuing funding rounds which may be difficult to reach. You might not have grown into your valuation yet and may find it difficult to top your initial valuation, which could result in the next round being flat or a down round. There’s also the question of managing early investors’ expectations. Seed and angel investors will likely expect an appreciation of their money, while later investors could think the company’s value is inflated.
Rather than shoot for the moon, here’s a better idea: Raise smaller amounts and perform rapid testing for proof of concept. Keep in mind, the goal is to bring in the right investors at the right time, not the highest valuation right away.
7. Not having an appropriate fundraise figure:
For entrepreneurs getting money in the bank is the most important things but keep in mind that this is not the only thing. An entrepreneur must remember that an initial funding round is just the first step in a long journey towards building a large, successful company. Raising too much money in the early seed or angel phase can create a difficult funding dynamic later on.
Raising too much money is a huge mistake many startups make. They think they want as much as they can get, but forget that this increases the amount of scrutiny and reporting they'll face, as well as the equity they'll give up. While a nice cushion of startup capital creates a comfortable runway, too much money in the system can lead to disaster. The expenses won't be justifiable later on, and you'll be forced to go through firing rounds, closing office spaces and budget cuts. Avoid these problems entirely by being down to earth and reasonable with the amount of capital business need and aiming for just above that number.
Conclusion: While building a business, never get obsessed with funding milestones. The focus should be on building a great company, long-term vision and creating value. Focus on building a solid business first. And when it comes to seeking investor dollars—do your homework. The best route to go is to always keep things simple. Be transparent, speak openly of any challenges you’re facing, and then focus on your vision and plan to see it all come to fruition. Throwing around fancy buzzwords with the intention of looking smart is a bad idea, as it does the complete opposite. Always treat an investor like a business partner.
Article By: Ms Bhavya Sharma, a Practising Company Secretary from Delhi. In order to know more about the above-mentioned topic. You can contact us at legal@bhavyasharmaandassociates.com or for more details you can visit: www.bhavyasharmaandassociates.com
Disclaimer: Although due care and diligence have been taken in the preparation and uploading this Article, Bhavya Sharma & Associate shall not be responsible for any loss or damage, resulting from any action taken on the basis of the contents of this Article. Anyone wishing to act on the basis of the material contained herein should do so after cross-checking with the circulars, notifications, press release issued by the concerned department or seek appropriate counsel for their situation.
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