Raising capital has the potential to impact your startup in a big way. If it goes well, funding can launch your company into a higher gear, allowing you to hire team members, earn new customers and gain more traction than ever before. While this may sound exciting, the road to fundraising can be a bumpy and unpredictable one.
There is no quicker way to lose credibility in the eyes of a potential investor than to be underprepared. That’s why we tapped into our network of entrepreneurs and investors all over the world to get their advice on the most common fundraising pitfalls they’ve experienced.
Before you start your next capital raise, invest time in avoiding these top five fundraising mistakes:
1. Not Having a Plan Post-Capital
One of the worst mistakes you can make as an entrepreneur going through a fundraising is not having a clear plan post-capital.
“It’s very apparent when entrepreneurs don’t have a clear idea of what success means,” said Herb Sih, the Managing Partner at Think Big Partners based in Kansas City, MO. “We always want to see that the entrepreneur has laid out a roadmap. We all need to be very clear on where they’re going and how they’re going to get there.”
Create a roadmap that details your financial plan once your capital is secured. Are you going to grow your team? Develop new products? This plan not only demonstrates preparedness on your part, but also shows that you’re committed to the life cycle of your startup from pre-to-post capital.
Investors want to see this kind of commitment and dedication. Make it clear before they have a chance to ask.
2. Presenting Unorganized Documents & Data
You have one shot to make a first impression with potential investors, and handing over unorganized financial statements or sloppy pitch decks will start you off on the wrong foot. Investors are looking for an easy-to-read presentation that they don’t have to spend hours trying to understand.
Be organized, clear and concise in the presentation of documents and data. This will help prove your professionalism and solidify your dedication to the company and the potential investor.
3. Lacking Focus on Cash Flow Management
Understanding how to manage your company’s cash flow is crucial to your fundraising success. You will lose trust and credibility with investors by handing over messy financials. It is a clear signal that you don’t have control of your business.
Investors want to know: how much money do you have and how far will it take you? What is your Plan B for raising cash? Debt, equity, equipment financing? Before you start your capital raise, invest time in answering these questions and understanding your cash flow management.
4. Maintaining a Dysfunctional Budgeting Process
A robust budgeting model is critical to strategic planning and should be a key component of your fundraising strategy. Budgeting provides a roadmap for your startup, while aligning your management team and sometimes forcing difficult discussions.
Investors will be asking the hard questions about your budget. Taking the time to create a realistic plan for revenue growth and associated spending will eliminate potential roadblocks during your raise. Good budgets reflect reality over aspirations. Although it is okay to present several scenarios, i.e. upside, downside and base case.
5. Using the Wrong Metrics (or not having an metrics at all)
It’s crucial for your team to discuss and understand what 5-10 metrics (or key performance indicators) should be measured, and then develop a plan for reporting them in a timely fashion. Be prepared to share this information with potential investors. A good place to start is by creating a daily, weekly or monthly dashboard, giving visibility to everyone on the team, board of directors and investors. We recommend measuring the following KPI’s:
- MMR (monthly recurring revenue)
- Churn (attrition or turnover of customers)
- CAC (customer acquisition cost)
- ARPA (average revenue per account)
- LTV (lifetime value)
Some investors see hundreds of pitches a month and can spot red flags within minutes of interacting with you and your startup. Avoiding these mistakes can mean the difference between walking away empty handed or getting one step closer to the funding your startup needs to survive.