Critical Funding Mistakes That Can Prevent Your Startup Making It Big

With entrepreneurship on the rise, thousands of companies are vying with each other for the attention of conventional and non-conventional sources of funds. An angel investor or even a middle-rung venture capitalist is typically inundated with business proposals with an overwhelming diversity of ideas and business models. While there is no dearth of brilliant ideas, generally the startups that are successful in accessing venture capital funds have robust business models supported by a smart pitch that takes into account investor concerns, and most importantly does not contain errors. Some common mistakes entrepreneurs should avoid making when trying to get funding:

Giving Away Too Much Equity in the Early Stage

Many entrepreneurs in their desperation to secure funding agree to give away a very large amount of the equity. If the idea and the business model are good, parting with too much equity may result in loss over the control of the company, and you could easily find yourself sidelined with the venture capitalist taking control of the company and driving it in the direction he wants, which could be completely divergent from yours. When you end up being a minority shareholder in your own company, taking important decisions and executing them can become impossible. Further, it can make securing additional investment more difficult as you have less to part with. If you are confident that you have a good thing going, try to give away as less as possible and ensure that you retain control over the company.

Startup

Ignoring the Financial Planning

Most startups are planned by entrepreneurs who are essentially technocrats fired by a big idea. A modern-day business organization not only needs a brilliant idea but also has to be adept in marketing, managing human resources, and financial planning as without these the venture will never succeed in the highly competitive scenario that exists in virtually every sector. While you should definitely chalk out the product or service idea in detail, you should ensure that you have a detailed business plan in place that incorporates the extent and timing of the investment, the cash flows, and the profitability in the short-term and medium-term, as well as the exit strategy for the investor.

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Not Knowing the Application of the Funds

When you are making a pitch for venture capital, you should be very clear about not only the total quantum of funds required but also at what intervals the cash infusions will be required and the purpose to which each of the tranches will be put to. It can seem strange, but many entrepreneurs seem to have only a very vague idea of what the fund requirement is and are unable to justify it with detailed breakups. Not having a financial blueprint ready at the time of making your pitch can put paid to your dreams of getting funding. Careless mistakes in the drafting of the business plan and financial projections can ensure that you make a quick exit.

Failing To Make a Compelling Pitch

While a proper business plan is vital for the venture capitalist to evaluate the proposal, it is also very important for the presentation to be precise and display your commitment to your business. It can often be better to forget about making a dry introduction to the project and instead tell them a story of how you were fired with the concept and what you did to validate your idea. Explain how it could be transformed into a profitable business that is significantly different from the competition and how it meets the real needs of the consumers. Tell the venture capitalists about your dreams for the business and let your emotions tell them more than financial projections, however, do be cautious of being overly dramatic and theatrical.

Not Having A USP

Many of the business proposals, which land on the desks of investors, are brilliant in conception; however, unless the product or the service the startup proposes to enter the market with has a distinct differentiator; it is unlikely to meet with much favor. The typically hard-nosed venture capitalists will be looking at you and asking about what it is that makes it a killer product. Unless the product is significantly different from what the competition is offering and fulfills the needs and aspirations of the customers in a significantly superior way, you might not be able to impress them and get your funding.

Failing To Project Future Business Growth

Entrepreneurs seeking funds for their startups tend to obsess over their immediate requirements, however, venture capitalists will be looking to invest for at least three to five years before exiting the company, and they will be really interested in both the short-term and medium-term financial projections and business plan. They may even ask you where you see the company in the long-term, in order to find out how committed you are. Remember, there may not be very clear answers all the time so it is perfectly okay to paint a few scenarios and engage in a discussion of what may transpire.

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Overvaluing or Undervaluing the Business

The valuation of your business is critical to your getting investment for your startup because it will decide how much the venture capitalist will have to pay to get a slice of your company. If you overvalue your business, the VC will be turned off and may not be interested in investing and if you undervalue it, then you would be giving away a part of your business cheaply. Valuation is not an exact game, so go into it with a few opinions from experts, and be prepared to negotiate in a middle ground. Use multiple valuation approaches and if you are not a financial whiz kid, it can help to take along someone who is to the presentation.

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Conclusion

It is important to know that for pitches to be successful in attracting investments they need to be tailored to the expectations of the audience. The points mentioned above, however, hold good for all the presentations you will be making to venture capitalist and other lenders of institutional funds.

Author Bio

Marina Thomas is a marketing and communication expert. She also serves as a content developer with many years of experience. She helps clients in long-term wealth plans. She has previously covered an extensive range of topics in her posts, including business debt consolidation and start-ups.