Fundraising is a crucial part of running a successful company. As a founder, understanding the nitty-gritty of raising capital leaves you with adequate funds to expand your product or service, hire more people, and invest in marketing. Unfortunately, the process is quite tricky and complex.
Moreover, the capital requirements of start-ups increase as the business grows. Hence, fundraising embodies the entire process of soliciting financial support for start-ups to operate and expand, and it is essential to know the mistakes to avoid during fundraising. Here are some mistakes that founders should avoid during fundraising;
- Failure to seek the help of a professional: To save cost, some start-up companies avoid consulting the help of professionals during fundraising. This inaction could be fatal to the company, mainly because these professionals can improve existing plans, offer objective insight on various topics, and access a network of investors, academics, and top talent. Accordingly, you need to hire professionals when preparing for a fundraising round.
- Raising too much or too little money: When fundraising for a company, it is essential to raise adequate funds to take your business to the next level—not too much or too little. Raising insufficient funds makes the smooth running of the company impossible because you would be unable to purchase required resources and hire excellent employees. Also, raising excess funds would put the founders under an urgency to put the money to use, even if all the facilities required to put the money to optimal use are not in place. Therefore, founders should raise just a little more funds than needed but never too much or too little.
- Approaching the wrong investors: When seeking financial support, adequate research should be done into the type of investors to come. Understand when you need angel investors, accelerators, or venture capital firms. Venture capital firms do not invest in companies seeking pre-seed funding, and accelerators do not invest in companies in series A. Thus, it is necessary to understand the fundraising stage and the appropriate investor for your company.
- Seeking funds too early: The risk involved in investing in a start-up company at an early stage is relatively high. Start-up founders should avoid taking unnecessary risks by seeking funds too early. So, before fundraising starts, the founder has to be sure all other necessary factors that would kick start the company’s set-up and smooth running and measures to reduce investment risk are in place.
- Fundraising too late: Fundraising for a start-up company should be done at an appropriate time because reaching out to potential investors at the wrong time could jeopardize the smooth running of a company. The best time to raise a fund is when you do not actively require it because it helps you develop a healthy relationship with investors and composes your pitch.
- Giving too much equity: While soliciting capital through fundraising, a founder should be careful and composed by seeking funds from sources that do not demand one to give excess equity in exchange for funds. An alternative is searching for grants, using personal savings and securing loans for cash needed on a short-term basis.
- Using a broker to secure investment: When sourcing funds for a business start-up, some people would help founders secure investment from potential investors that would provide financial support for the company in exchange for a percentage of the invested money. This form of fundraising is not encouraged and should be avoided by founders, especially for a company at an early stage.
- Complicated pitch: A pitch deck is a brief presentation to the investors or clients that summarises the business plan and expansion. Raising funds is quite complex, and the failure of founders to effectively promote their business idea to investors can make fundraising hectic. Founders must express their pitch deck to investors in simple words that make communication effective.
- Ineffective communication: Communication is an influential aspect of fundraising because a founder has to be persuasive while soliciting financial support from investors. Your words and actions must communicate enthusiasm and trust in your business plan, which will help attract potential investors.
- Failing to follow up: Founders should always be in touch and follow up with investors because they are busy and get side-tracked quickly. Thus, the saying goes, “out of sight, out of mind.” You, as a founder, need to stay at the forefront of their minds. Hence, you should follow up after the introduction, pitching and all interactions and fix the subsequent appointment a couple of days after promoting your business plan.
- Not having an alternative plan: As a founder, have backup plans Not because your main goal is not solid enough to help you raise funds, but because it gives you an edge and makes negotiation easier with investors.