Welcome to a new BetaKit weekly series designed to help startups and entrepreneurs. Each week, investors Roger Chabra and Katherine Hague tackle the tough questions facing founders today. Have a question you would like answered? Tweet them with the #askaninvestor hashtag, or email them here.
There are so many moving pieces to a fundraise and even the most seasoned entrepreneurs make mistakes. Luckily, every entrepreneur can learn from the mistakes of others and avoid the most common pitfalls. Here are what I would consider the top ten mistakes that founders make when raising their first round. Read carefully and be sure to steer clear as you continue your fundraise!
1. Waiting too long to raise
When you set out to fundraise, leave yourself at least six months of runway. Avoid waiting for the next milestone, or the perfect time to raise, while running out of time and money. It could leave you without the necessary time to raise, and result in premature death for your company.
2. Raising with nothing more than an idea
Only entrepreneurs with a strong track record can raise money with nothing more than an idea. Build your prototype.
There are very few people in the world that can raise money with nothing more than an idea. Generally, the only people that can do this are entrepreneurs with very strong past relationships and a track record for building incredible products and making money for investors. Prototypes are easier to make than ever. Make sure you have at least a basic working prototype (also know as an MVP — minimum viable product) when you start raising.
3. Putting all your eggs in one basket
Many entrepreneurs raise in sequence rather than in parallel, putting all of their hope in a single investor issuing the right term sheet at any given time. You can’t bank on a single investor to give you the best terms. Without a competitive environment, they have no incentive to give you better terms or commit. Take your meetings in parallel and create a competitive environment.
4. Overemphasizing the importance of valuation and over-optimizing terms
Ensure the terms you are getting are fair and in line with market, but don’t over-optimize. Get good investors. Keep the terms clean and get back to work. Yes, if you have leverage you can ask for what you want, but don’t jerk your investors around or be disrespectful to anyone you meet in the industry. And don’t ask for such a high valuation that you set yourself up for a down round in the future.
5. Not hearing no
Many investors will never actually tell you no, at least explicitly. They may be trying to avoid a socially awkward situation, or they may be trying to leave their options open to invest in the future. You need to read between the lines. Responses such as “come back when you’ve hit X milestone,” or “let’s talk when you have a lead” are all ways that investors are actually saying no. In Sam Altman’s words, anything that’s not a term sheet is a no. Hear it and move on.
6. Not doing your research
Make sure you know who you are talking to when you email or meet with an investor. Make sure you know what standard terms are for your stage and industry. Not knowing the area of expertise of your target investor, what related companies they’ve invested in, and their experience will make you seem very unprepared and unfocused in your fundraise. Asking for terms that are non-standard, or valuations that are either way higher or way lower can also signal a lack of preparedness.
7. Not having a lead investor
Not securing a lead will make the rest of your fundraise more difficult. Even if you are able to put together a party round (a round without a lead), it’s probably not in your best interest. Having an investor truly invested in your success can be to your advantage, particularly as you plan for your next funding round.
8. Pitching poorly
Your company doesn’t speak for itself. You need to bring the story to life. Even with the best pitch deck, a bad presentation, or a founder that can’t express their excitement for their product, won’t be able to elicit excitement from investors. Founder passion is contagious.
9. Prioritizing money over the right investor
Not all money is good money. In fact, some venture money can be very harmful when you get it on the wrong terms or with the wrong investors behind it. Check the references of your major investors. In particular, talk to entrepreneurs they’ve invested in. Don’t take money from bad investors. You’ll come to regret it down the line.
10. Not understanding your own business
Not only do you have to be able to paint the big picture, but you also need to understand your key metrics, your margins, and your operations plan. Ensure you understand your own business before stepping in front of an investor. And if you miss something, learn as you go.
Bonus: Raising too much or too little money
Raise enough money to get you to your next major fundraising milestone, and leave wiggle room for unexpected expenses or slower sales cycles. Don’t raise so much money that you lose control of the company spending or have a valuation so high you risk a down-round in the future.
Editor’s Note: This list of top tens is an excerpt from Katherine Hague’s new book – Funded: The Entrepreneur’s Guide to Raising Your First Round. The book is now available through O’Reilly Media.
Roger’s Take:
In my experience, entrepreneurs in our ecosystem are much better prepared than ever before. I see fewer and fewer “common” mistakes being made. Good entrepreneurs take the time to plan their fundraise, are well-read, and reach out for advice from mentors and other entrepreneurs. This is a great thing. However, below are a few mistakes I have seen recently.
- Not customizing your deck or pitch. You customize your deck and pitch for different customers meetings, so why wouldn’t you do something similar for investors? At a minimum, talk about why you selected this VC as a potential and how you fit into their portfolio strategy. Even better, dig deeper and find something specific about your investor (or their interests) that will help build a relationship and show you did your homework.
- Bringing the wrong people to a fundraising meeting (more here)
- Not building on momentum – as with your company traction, fundraising traction is all about momentum. Once you have it with a solid lead investor, capitalize on it and close quickly. It’s rarely in your best interest to drag things out looking for a better deal or better investors etc.
- Not having a data room – prepare you follow-up due diligence materials ahead of time. You should be ready to send a Dropbox or Google drive link to a prospective investor as soon as they express interest in moving forward.
- Asking for an NDA – ugh!
- Presenting a “we’re ready to join once the money is in” team – showing a management team slide with a bunch of impressive folks who are ready to join once you raise money is not helpful. It undermines your ability as a founder to recruit and sell. You’ll continually need to bring on star people over the life of your company, and you’ll rarely be in a complete position to do so cash-wise. It’s up to you to find a way and convince them to join ahead of all this. Startups are risky. I get it, people need to eat – but let’s face it, in early stage startups, there’s no room for risk-adverse folks.
- The old “we have no competition” statement – your potential customers are doing just fine without your product in market. They will survive with or without you, trust me. Your customers are meeting the need you are solving one way or another (albeit, less efficiently) today. Consider other ways they are getting things done today – this is also your competition to talk to and address as part of your pitch.
- Targeting “Zombie” VC funds – it takes many years for a VC fund to shut down. Often funds will still give the outward appearance of “business as usual” and some bad actors may even still take meetings with pitching entrepreneurs. Make sure the VCs you are spending precious time targeting actually can write you a cheque. Research when they did their last new investment – via the Internet (e.g. Crunchbase, Mattermark etc.) and more importantly, through conversations with mentors and other entrepreneurs around you.
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