Fundraising is one of the hardest jobs a founder will have. An average VC invests in one out of a thousand proposals they receive. You could spend months of time and effort and still have a very low probability of success.
I always advise founders to not chase capital unless it is essential to their success. In the early stages, capital is rarely the critical success factor. Time spent on customers and product is usually far more productive. Revenues is a much cheaper and faster source of capital, and more importantly, provides real validation and momentum. You should defer fundraising till you are ready to scale a validated proposition. Very few business models are critically dependent upon capital. Unless your model is (one of the rare ones) critically dependent on capital, your time is much better spent building the venture.
For fundraising success, credibility is more important than the idea. An investor will not hand over a large sum of money for just the promise of a possible return in the future, unless they trust you. They have to trust your integrity, competence and commitment. Demonstrate these qualities before and during the cycle.
Whenever you are ready to raise funds, avoid these common mistakes founders make in fundraising and pitching:
- Underestimating time & effort
The cycle of fundraising demands your time and a lot of effort. It is is very tempting to start if you get a mail from a fund or see a event which promises to connect you to investors. Realize that to take the process to completion will require months of near full-time effort. Many times, the founders underestimate this and get stuck in the whole process. The venture suffers as a result. You should plan upfront for the time fundraising will require, and it’s better for one of the founders to be dedicated to fundraising and out of daily operations for the cycle.
- Drawing out the fundraising cycle
A long drawn fundraising cycle is very taxing on the entrepreneur and the venture. Further, a long fundraising cycle creates a negative impression in the market, as investors assume that the company is unable to raise funding and is therefore flawed. Whenever to choose to engage with investors, run a well-planned and finite campaign. Identify all potential investors you want to reach, find a reference, connect and follow-up, and give yourself a defined timeline to close the process (either way), else you risk getting stuck in perpetual fundraising. Get advice on the process.
- Cold-calling investors
Usually, founders are not linked with investors which is why they resort to cold-calling. This is a bad idea because you’re very unlikely to get anywhere this way. Investors rarely look at a proposal that has not come via a trusted reference. Fundraising is all about credibility. You have to build your credibility and network to reach out to them.
- Overcomplicating your pitch
If you have not captured the investor’s interest within the first few minutes, they are likely to lose interest. What sells is a succinct story. An investor makes up their mind in the first few minutes of your pitch. The rest is just validation. So, keep it simple and compelling.
- Not being able to tell your story
If you follow the templates and try to put in everything that you might think should be there in the pitch, you will probably end up losing the investors. They invest in future potential, a big idea, which can only be communicated by a story. Be a storyteller. Be engaging.
- No bottom-up sales projection
A bottom-up sales projection puts your targets into context. This is something that every investor looks forward to, in a pitch. Saying things like “if we capture even 1% of this market” is the sign of an amateur.
- No customer validation
If you’re launching a product or a service, you must have a clear understanding of the people who would want to use it. Customer validation verifies that the problem your product or service plans to solve actually exists and customers are willing to pay for it. The most successful entrepreneurs have talked to a lot of customers and tried to understand their unmet needs.
- Chasing competitors and awards
Your startup is attempting to solve a problem for customers. . You will win or lose on the opinion of the customer, not on the opinion of competition judges. No serious investors gives much credence to most startup awards. Competitions are fun, you can even learn by participating occasionally, but remember that any time spent on chasing an award is spent away from your customer and product. Choose wisely..
- Obsessing over valuation
The three most important factors in fundraising are: timing, quality of the investor, and the terms (other than valuation). Valuation is a distinct fourth. These other three factors will make much more of a difference to your journey and outcome than valuation. While valuation has to be reasonable, don’t obsess over valuation. In fact, raising money at too high a valuation is often harmful later as it increases your chances of a down round..
- Asking the investor to commit First
Several entrepreneurs believe they have a wonderful plan, a team ready to quit their jobs and start, everything ready, just waiting for an investor to commit funds for them to start. They will be waiting a long time. An investor will back a committed team, ideally with momentum on their side. . Only when you start, get customer validation and start building a business would an investor be interested in you.