The issue that nearly every startup faces during its early phases and even after launch is raising funds. As the startup scene grows, it’s getting much more difficult to interest investors in new concepts.
That’s why it’s extremely important to make sure your startup is innovative, offers value, and provides profit potential.
Common fund-raising mistakes
There are common mistakes that entrepreneurs make during their sales pitch to investors, which inhibit their chances of raising money. These include:
- Connecting with investors at early stages. Many entrepreneurs try to connect with investors at the idea stage — that’s the hardest time to find financial backers. You need to make sure that your idea is innovative, unique, and has great potential. Only after you have invested your time and your own money into your idea will you be able to convince investors to believe in the future success and potential returns of your product or service.
- Reaching out to the wrong investors. Before reaching out to investors, determine who has a track record of investing in startups from your industry. Learning about an investor’s focus, previous investments, and objectives are crucial and will increase your chances of getting funds.
- Preparing a bad pitch deck. Your presentation plays a key role in the process of raising funds. It showcases your product, business model, and monetization strategy. Entrepreneurs underestimate the power of “selling” their idea to investors. It’s also not only about the presentation. It includes the way you talk about your startup, how you behave, etc., during the pitch. Can you fill a potential investor with your passion, excitement, and determination?
These mistakes can be easily avoided. However, there are still some challenges entrepreneurs face. One of the most critical is getting investors interested in your idea.
Challenges entrepreneurs should expect while raising funds
As you’re building your startup, you are going to face many challenges, especially during the fund-raising stage. Here are some of the common challenges founders face when trying to raise capital:
Lack of guidance
Not every entrepreneur has an advisor or mentor, and this makes it very difficult to find the answers to questions that arise during the fund-raising process. Having a mentor will give you the needed guidance and support.
You will feel more confident about your potential, and chances of finding investors will increase.
Lack of technical terms knowledge
Some founders don’t know the difference between an angel investor and a venture capitalist (VC) or aren’t familiar with a pitch deck. These are red flags for investors. That’s why make sure you learn all technical terms involved in your startup and in general. Educate yourself on the business jargon and common industry practices to show investors that you’re a reliable and trustworthy candidate.
Lack of financial record
It’s impossible to build a startup without proper, sufficient financing. A financial record gives you an opportunity to convince investors. However, for early-stage startups, this is a vicious circle. No business person wants to invest with someone who doesn’t have any “skin in the game”. If you don’t even believe enough in your idea to wager or leverage all, or at least a significant portion of your money and assets, why should they?.
A good solution would be to find a financial partner who could support the startup financially and be on record for other investors to see.
No record of cash flow
No record of cash flow is not a good sign for investors. It shows that investment may be risky. If your startup has no sales history, you can try searching for angel investors who believe in your idea and want it on the ground floor. It’s extremely challenging but worth trying during the early stages.
How investors will notice your startup
As we’ve already said, the key problem many startups face when it comes to fund-raising is getting into the spotlight amid the crowd of competitors.
According to Statista, there were more than 800,000 startup phase businesses in the U.S. alone in 2020. No venture capital fund can pay attention to every nascent business venture.
This is why startup incubators and accelerators are so popular. They do require a share of the startup’s equity, but participating ensures a time in the sun for everyone, so investors have a better chance of noticing interesting ideas.
Many prominent startups participated in accelerators and raised the funds needed to succeed:
- Uber got good coverage at Techstars in 2009, and the accelerator invested in the startup as a part of its initial seed round. This spotlight was one of the reasons Uber became the unicorn it is today.
- Airbnb took part in Y Combinator in the wake of the 2008 financial crisis. The platform invested $20,000 in exchange for 6% equity and gave the startup one of just 20 places in its 2009 class. It was a wise investment indeed, as Airbnb is now valued at more than $100 billion.
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Raising capital can be difficult and even frustrating, but by avoiding common mistakes and preparing for possible challenges, you can make this process a bit easier.
Getting noticed by investors among the pool of other great startups may seem to be impossible. However, as statistics shows, participating in accelerators allows to raise the funds and get attention from investors.