Today, we will continue our journey called Financing. This really can be a considered an authentic journey, as financing requires a lot of effort and time. We started with the different stages of financing– and when these would suit your business best. Often, only the successful funding rounds hit the news; it seems that raising funds is something everybody can do! However, there are many companies that don’t succeed, most likely because of one of the reasons we are about to discuss in this article. So, grab your notebook and make sure to avoid these funding mistakes!
1. Raising too much money
Especially for early-stage companies, raising money is a necessary step to be able to develop and grow a business. As ‘the more, the better’ sounds attractive here, raising too much money is one of the biggest traps. Besides the fact that it is simply unethical to raise more money than you need, it will cause you problems later on. When you raise capital, investors want to see a detailed investment plan, clearly defining how you will spend this money. If it took you more money than average to reach a certain point, stakeholders may become skeptical about your skills and your management. Moreover, the more money you raise, the more ownership you have to give away to shareholders.
The art is to be creative and do the most with the least money. The more money you raise, the higher your stakeholders’ expectations will be.
2. An unrealistic high valuation
You probably read about the mountain high valuation of Uber, Snapchat and Facebook. These valuations are quite hard to understand- how can a photo app possibly be worth $50 BLN?
Getting a company valuation that is much higher than you expected might feel flattering, but is far from ideal if this valuation is set too high. With the Equidam technology, startups that are developing disruptive technologies sometimes get a very high valuation estimation. This is mainly because of the projected growth and revenues once the innovative technology is developed and launched. However, it’s tricky to fully rely on this number as there are many things that can change along the road. We advice not no only look at the final number, but to look at the information behind it, so you better understand how the system got to this valuation.
Business owners who use Equidam often get in touch to get more insight into their valuation. We love to discuss their valuation, and explain where the numbers are coming from. What our customers particularly find interesting about the Equidam valuation technology, is that it also takes into account qualitative information, like the experience of the founders, the team and the country a company is based in.
Having a valuation that is too high can harm your business in many ways. First of all, a high valuation sets high expectations. Moreover, when you start a second funding round, your current investors will like to see an increased value of their shares, which might be difficult to achieve.
When valuing your business, the goal is to give a most realistic picture of your company as possible, while at the same time, showing your business’ growth potential.
3. What are the benefits for your investors
When pitching your business to investors, the most important part often gets lost. Prototypes, a business plan, a stunning slide deck… You try everything you impress your potential investors. But, then you might forget about the most important aspect: your story.
Especially when your company is early-stage, and there is little track record to rely upon, investors are interested in the people behind the business. Communicating your passion, vision and goals helps investors to assess the potential of your business and the benefits they will get from investing in your business.
When your run a crowdfunding campaign, make sure that your clearly explain on your campaign page the benefits for your potential investors. Only listing the cool features of your new technology or the innovative design of your product, doesn’t tell them why they should invest in your business. Rather, explain why it’s so interesting for them to invest in your company, where you want to be in 5 years and describe the great people you are working with to make it more personal.
When there are many, smaller investors, it is also common to give your backers a present, for example (a limited edition of) your product. This often happens in the case of crowdfunding. This will create a win-win situation: your investors are happy with their present, and chances are high they will help you spread the word. After all, word-to-mouth communication is still a very important way of marketing.
4. Thinking that investors will come anyway
Raising capital is marketing, and a lot of networking. Even if your business gets exposure, for example via a crowdfunding campaign, you’ll have to do the work and convince investors to invest in your company. I think that this point elaborates on my former point, as you clearly have to point out why exactly investors should invest in your business- and what they will benefit from it!
When seeking for Angel Investors, there are so many businesses like you looking for funding, leaving investors with many options to choose from. You’ll have to reach out them, as they likely won’t reach out to you. It takes a lot of dedication and effort to make your business stand out from the crowd- click here for some tips!
5. Taking the wrong financing route
If you fail to close your funding round, it might be that you took the wrong financing route. As we’ve discussed earlier, some ways of financing are particularly suited for business in a specific stage of development. To learn about the best way of financing for your business, click here.
First it was assumed that crowdfunding was only for startups, but now also small to medium businesses use this source to raise capital. However, it is still important to choose the right type of platform. There are several types of crowdfunding, for different businesses and purposes. If you want to raise money for a social good, you have a higher chance of succeeding when you pick a crowdfunding platform for social projects than debt crowdfunding for example. While angel investment will get you helpful advice from experienced entrepreneurs, it also means that you have to give away some of your shares.These are all factors you have to take into account when making a decision upon financing.
Do you homework properly by consider all options- and also look how companies similar like your raised funds. This will help you making a well-informed decision afterwards.
Raising capital from external investors is a tough job- we’ve been there as well. Are you faces some tough funding challenges, or do you want to share your experience with us? We’d happy to hear your story! Let us know via email or tweet us!
Great discussion Daisy. Having funded about 70 deals I would suggest that not raising enough money is also a big mistake. Deals seem to take longer and cost more than you expect. It’s hard to go back for more money.
That’s an excellent point, Bill, you’re right indeed and most of the people wouldn’t even dare to go back right after a financial round, causing often the startup to fail before it even begins. Thanks for your insight on this! The Equidam Team