If you are a startup founder raising capital for the first time, you are likely stressed out and scared. Don’t be!
In this article and the corresponding video, we discuss the three most common mistakes inexperienced entrepreneurs make on their fundraising journey so that you can avoid falling into the same traps and get funded faster.
Mistake # 1: Raising capital too early
All investors have their eligibility criteria which determine which startups they will consider for investment. If you don’t meet those minimum requirements, you are not a viable candidate.
We thus recommend that you first research which funds or angel investors you can contact based on their qualifiers and where your business is right now before you begin sending your deck around and going to meetings with anyone who’s got a checkbook. This will not only save you time but also ensure that you don’t lose an opportunity to speak with a prospective investor when you are ready.
Mistake # 2: Inadequate legal foundation
No Co-Founders Agreement: Most startups with two or three co-founders don’t sign any agreements between themselves until they begin raising money. That is a mistake. While you and your teammates may think you will be together forever, the reality is that life gets in the way. A startup journey is wrought by ups and downs. Priorities change, disagreements abound, people burn out or turn out not to be who they said they were. If you don’t have a signed agreement clearly outlining everyone’s responsibilities, milestones, vesting schedules, and a process for a large stakeholder to exit your venture, you may be setting yourself up for difficult times ahead.
The greedy pay twice! Don’t make this mistake, spend money on a lawyer, and build a solid foundation for your company to succeed.
A Crowded Cap Table: It is very common for a startup in the bootstrapping stage to offer equity in their company as raffle tickets to any service provider who would take it, to avoid parting with their hard-earned cash at all costs. Another mistake! Like we discussed in our article on equity compensation, equity should only be offered to those service providers who will be involved with the company long-term.
The last thing you want is to end up with 20 “investors” in your company, just because one of them did your logo, another created your website, and so on. Investors don’t like it, and it will make your fundraising process infinitely harder as you attempt to explain away your equity- giving rationale.
Mistake # 3: Beginning to fundraise when you REALLY need the money
As we discussed in our recent blog, making investments is a form of trust, and building trust takes time. If you start raising capital under financial duress and before you had the opportunity to build that trust, there can only be two outcomes.
Outcome # 1: You fail to raise capital in time and have to say “goodbye” to your venture.
Outcome # 2: You are forced to accept unfavorable financing terms as a “payment” for the lack of trust.
Strategic planning is key, and if you plan your fundraising process carefully, you will increase your chances of success.
For more insights on how to create an effective fundraising strategy, check out Course # 5.
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