The journey from fledgling idea to fully-funded, established startup is a rocky road, one paved with pitfalls and laden with shortcuts that sometimes ultimately lead to nowhere. Even the most intelligent, thoughtful entrepreneurs can easily fall victim to a few of these traps along the way. And, unfortunately, their capital raising efforts are usually what will take the brunt of the impact when they do.
Naturally, that’s a huge issue; if there’s no funding, there’s no business either! However, this is far from inevitable － at least, provided you know what to look out for. Need a little help in that department? Here’s some much-needed advice that will assist you in avoiding some of capital raising’s most common pitfalls and ensure your startup is truly set up for success.
Be Practical in Your Pitching
Getting to know your audience and catering to them － that’s good business 101. All of us learn this at some point and most of us just intuitively “get it” from the starting gate. Yet, when we’re in the early days of our business ventures, this sort of common sense seemingly vanishes from our minds, overshadowed by a charming (if unhelpful) entrepreneurial enthusiasm that assumes any and every investor worth their salt will immediately see our startup’s potential.
Here’s the thing, though: investors aren’t magic. They aren’t all-knowing, nor do they actually have some strange sixth sense that can sniff out profitable business ideas sight unseen. You have to show them, prove to them that you have something of value.
As we explain in our upcoming webinar, “How to Raise $1 Million In One Year,” you want capital for a short-term purpose, but what investors want is to know how you’re going to change the world. Successfully explaining this will be all in the pitch, which means you need to know precisely who － not to mention how － to pitch in the first place.
Many get this step wrong, targeting the wrong stage or type of investor, going after funding from those outside their country, unrealistically presenting their potential value, or appealing to complete strangers. You can steer clear of repeating these mistakes, though, by:
- Not hitting above your weight class. Stick to seeking investments from friends/family and startup accelerators if you’re in the pre-seed funding round or angels and early-stage VCs if you’re seed funding.
- Keeping your investor search close to home. Tax laws generally demand all investors reside within your business domicile country. Although there is some flexibility for already-established global investors, it’s within most new startups’ best interest to keep things as simple and straightforward as possible.
- Pitching to people you know. There are certainly some exceptions to the rule, but most investors aren’t willing to invest in young, unfamiliar startups due to the inherently high risk that presents. Circumvent this by asking for funding from people who already trust you, respect your ideas, and feel secure that they’ll receive a return on their investment.
- Being realistic about what your startup has to offer. Don’t overvalue your business － stay objective. What do you have versus competitors? How do you intend to meet demand, address market trends?
Approach Your Startup From a Solutions-Forward Mindset
Okay, all this being said, we need to make one point abundantly clear: playing by the startup rules will get you far, but it won’t get you everywhere. Sure, it can seriously help you avoid certain pitfalls in the battle for acquiring capital, yet it can actively put you at risk of falling to others, and this is especially true if you’re being a little too safe.
You see, just like in life, business is all about taking chances. Staying along the beaten path can get you on par with others in the market, but it will never help you overtake them, never gift you that special “something” that gets investor attention. Risk － calculated risk, in particular － is what’s necessary to gain that value we mentioned before and thus rise through the funding ranks.
How do you take calculated risk, though? Where should you start when you’re still pre-product or in the process of gaining traction? Our suggestion is to build a solutions-forward mindset into the startup itself.
What do we mean by this? Essentially, you should be answering questions, providing genuine innovation with your product or service.
One of the most pressing issues that hold startups back from getting the capital they need is that they aren’t novel enough or don’t have the relevancy required for success beyond initial hype. By introducing something new to your related market space/offering solutions to current problems, you demonstrate that you have staying power and money-making potential, and investors can then feel safe extending their resources.
So, as you’re developing your ideas and forming your business’ identity, spend time clarifying what you hope to help solve － for the world, your future customers, and investors alike.
Do you want to reduce auto accidents caused by mechanical failure? Do you want to make textbooks more affordable by changing how they’re produced or marketed? Are you looking to use customer feedback to improve satisfaction/retention? Do you hope to use certain machines to reduce labor and customer costs?
Whatever your aim, have one. Be clear and passionate about what you want to do, and search for those who support you in that mission. Not only will this secure you the funding necessary to take your venture from concept to creation but will shape a mission that’ll enhance your business’ longevity.
Build Knowledge & Foster Relationships
Besides being too small-minded with business approach or pitching in the wrong ways, a major source of startups’ funding issues stems from two critical deficiencies: a lack of knowledge and a small network. The former oftentimes comes in the form of market unawareness, but it is just as frequently a minimal understanding of the law.
Working with basic consultants rather than actual brokers, immediately discussing investments with those freshly at the table, falling victim to reverse solicitation; it’s easy for new startups to check ‘yes’ on any or all of these boxes. That is incredibly dangerous plus potentially very, very illegal. Putting in the work to understand general solicitation laws, SEC rules, the Securities Act of 1933, and regulations like 506b, however, can keep you, those you work alongside, and your money safe and sound.
Meanwhile, proper networking can also go a long way to preventing you from teetering on the edge of some serious capital raising don’ts. Not a natural when it comes to forming relationships with potential investors or partners? Rest assured; it’s not nearly as difficult as you may expect.
The major keys here are to start early and abstain from burning bridges. We point this out in our Ultimate Guide to Raise Capital for a Startup (Subscribe now. This is coming soon.), although it’s worth reiterating. The venture community is small, almost claustrophobically so. Ending even one potentially beneficial relationship can spell disaster for your funding before it has a chance to really get going; don’t open your business up to this possibility.
Keep in touch with people, and don’t shut the door on investor opportunities. Reach out, even if just with an occasional newsletter or to quickly mention something you’re working on. Don’t bother them but do make sure to follow up and remind them of your project. It’s the professional thing to do and will likely be the main way you’ll secure investments at this early point in your startup journey.