5 Risky Fundraising Mistakes That All Startups Should Avoid
David Ehrenberg has seen it all. As the founder and CEO of Early Growth Financial Services, a Silicon Valley-based firm that serves 18 percent of the country’s privately funded venture capital-backed startups, he knows that entrepreneurs inevitably make mistakes. But in the uber-competitive world of startup financing, he’s found that certain mistakes may mean your great idea never gets off the ground. We caught up with him between meetings to find out the key fundraising mistakes he advises entrepreneurs to avoid
Mistake #1: Going it alone
It’s your brainchild, so it’s understandable that you don’t want to give up control. But going it alone is usually not a winning strategy with venture capitalists. Investors will want to see a strong team at the helm with a diverse skill set.
“We see a lot of founders who make this mistake,” says Ehrenberg. “It is incredibly important when you are starting out to identify the skill sets you need and the right folks who can cover those areas.”
“For example, we’ll often see a couple of MBA folks who don’t have the technology chops to pull off what they’re trying to do, or we’ll see technology founders--engineers or computer scientists--who don’t have the business acumen they need,” he says. And it’s not just your background and skills, but your personality traits as well. Introverts should look for extroverts to balance their team.
Ehrenberg recommends founders identify their weaknesses and bring in extra firepower to cover the areas in which they need help. You can also bolster your team’s skill set by seeking out mentors in your field.
Mistake #2: Believing your great idea is all you need
Of course a great company starts with a great idea, but that’s not enough. You need to show investors that you are ready to hit the ground running in order to turn your idea into a moneymaking enterprise.
“The days of being able to raise money on a Power Point presentation are gone,” Ehrenberg says. “At this point, investors are looking for some type of initial traction. This doesn’t necessarily mean that you have revenue; it could be that you have a beta product, an initial base of customers or a partnership set up. Whatever it is, the more traction you have, the better off you are going to be with any kind of equity investor.”
This may mean bootstrapping and relying on friends and family much longer than you anticipated, but it also allows you to be in complete control of the process during those crucial early months.
Mistake #3: Ignoring the back office
Entrepreneurs are often so focused on their product and marketing plan that they neglect the “boring” stuff: strong accounting and recordkeeping systems and strict regulatory compliance. This is a mistake that can come back to haunt you down the road.
“If you don’t have a sound infrastructure in place in the beginning, it can make things much more difficult as you progress,” says Ehrenberg. “Make sure you are complying with all governmental rules and regulations. It costs more money to fix it later than it does to do it properly from the start.”
You don’t need to hire an entire accounting department. You can invest in some good software programs and maybe even outsource these tasks to keep it simple.
Mistake # 4: Targeting the wrong investors
Don’t waste your time targeting investors who don’t fund startups like yours. Do your homework and find investors with a track record and interest in your business sector–investors who aren’t already overexposed in your industry.
“Don’t just focus on the venture capital firms that are interested in that space, but on specific venture capitalists within those firms that are interested in your space,” says Ehrenberg.
In addition to your sector, Ehrenberg suggests you make sure investors are funding projects in your geographic region and at your stage of business development as well.
Finally, not all investment is good investment. Be sure you are on the same page with your investors. It’s better to turn down a funding opportunity with the wrong investor than to end up in a dysfunctional relationship that threatens your business down the road.
Mistake # 5: Poor timing
Timing can easily determine your ultimate success or failure. Unfortunately, it’s a hard thing to control.
Ehrenberg suggests that you find out whether your business idea is “hot” right now. “Venture capitalists can be very fickle about the next bright shiny object, and that can end quickly,” he says. “It’s important to understand what the appetite is in the marketplace. If you’re not in a hot space, it’s going to be much more difficult to get something off the ground.” Try to time your pitch when there’s a lot of buzz around your sector.
“We see a lot of companies that are in a space that’s very hot, they go out and raise $2 or $3 million, and start executing their plan, but when they go back to raise a new round of funding their space is not as hot, and they find themselves in a tough position,” warns Ehrenberg.
His advice? “Understand what’s hot and what’s not. If you’re in a hot space, raise as much money as you possibly can, because it’s probably not going to be hot for long. Just make sure that money lasts as long as it possibly can and you get as much initial traction as you can.”
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