Funding a new business is part and parcel of an entrepreneur’s journey.
You have a great business venture idea (or at least you’ve been told by family and friends that you have a great idea) and you are now raising startup capital but why, oh why is it that nobody wants to invest in your business? Where is the funding?
There are several mistakes on raising startup capital that could be the reason why it is difficult for banks, private investors or for venture capital firms to invest in your business.
“The best startups generally come from somebody needing to scratch an itch.” – Michael Arrington, founder and co-editor of TechCrunch
Raising capital can be a challenging process, especially in an economic environment marked by so much uncertainty and risk as the case in the current South African economy. The never-ending political turmoil, recent downgrades of banks by international rating agencies, and the overall societal challenges we face are just a few challenges startup companies will face over the medium-term. But entrepreneurs often make the process harder on themselves by committing several avoidable mistakes. Regardless of your industry or the size of your funding requirement, here are 5 pitfalls to avoid.
Five Pitfalls to Avoid When Seeking Startup Capital
- Poor Preparation: There are entrepreneurs thinking that enthusiasm and passion would be enough to start and keep a business. Unfortunately, if you are looking for startup capital, investors are not only looking for proper attitudes, they are also looking for a complete and solid business plan. You need to be prepared with your business plan when going to a meeting with bank or loan officers. This would show how important the venture it is. Nothing is more disastrous when an applicant files an application that has an incomplete business plan. You do not just need funds; you also need solid management skills. Another common mistake is forgetting about the managerial aspects of the business. A bank loan grantor and venture capital investor are looking for something when they meet you, how you will return their money and investment. Nobody could be successful without having somebody to help. You would have to get the best people out there.
- Structuring the Agreement: Most of the entrepreneurs who apply for starting capital are actually asking for the amount based on the best performance of their business. It is important to calculate the amount you will be needing in the worst-case scenario that could happen. Others would commit the mistake of actually not being too conscious about the legal agreements. If you are not confident with dealing with investors, then it is for the best to get a lawyer that has experience in the field of business agreements. This would ensure that the financial terms would not be taking advantage of you and your business.
- Managing the Money: Proper management is the key. In fact, proper Cash Management is key. It is natural to have difficulties in the first year, but overcoming it is important. There are entrepreneurs that would start a business just because of getting excited over it, but once they experienced a difficulty, they would let it go completely. When having difficulties with business, some entrepreneurs tend to keep the problem to themselves. That is something you should not do! Look for people who can help you. Of course, there are mentors who are willing to help you out with your business issues. Asking for help or guidance is not a sign of weakness, rather it is about acknowledging your weaknesses and working to overcome them. You do not have to build a fortress around your business. Community involvement can help you get additional business contacts and at the same time impart your blessings and knowledge to other people. Your business venture would benefit a lot from startup capital offered by different institutions. But it is not just enough to get the capital. Startup capital for your venture is just a boost. Effective management of your business is the lifeblood.
- Not Working with a Lawyer: People starting companies like to do things on their own. And they’re often reluctant to spend money on advisers – particularly lawyers – especially if they’re still self-funding or bootstrapping their business. But the do-it-yourself attitude is dangerous when it comes to raising capital or selling your business. Skimping on legal advice is a guaranteed way to run into problems down the road. Even if you use document templates, be sure to run them past your legal counsel. Disputes over investments could be costly or make attracting future investments impossible, so have a lawyer manage this process. But, you don’t want to depend on lawyers too much. While not working with a lawyer when you’re putting together a deal is dangerous, it’s also foolish to depend on your legal counsel for everything. It’s your business, so you need to understand the terms of the deal that you’re offering. Make sure you have the pre- and post-money valuations down cold. If you’re the “visionary” type who isn’t comfortable with numbers, this means you’ll just need to work twice as hard to wrap your mind around the key aspects of your deal. Telling a potential investor “I don’t know; let me check with my lawyer” when asked simple questions isn’t a good way to instill confidence and it will most definitely hurt your credibility. You have one opportunity to make an impression.
- Complicated Finance Deal Terms: KISS (Keep It Simple, Stupid) is a good rule of thumb in structuring an investment. Funding should not require you to be a rocket scientist. Sometimes investors, especially unsophisticated ones, will push for complex deals that give them unusual rights and are loaded with stipulations. This is generally bad for a couple of reasons. First, strange terms can come back to haunt your company if you later find yourself in violation of some long-forgotten clause. Second, future investors will look at excessive rights given to an earlier investor with skepticism. Why should they put their money into a venture if some earlier investor has veto rights? Negotiate for a fair deal, but keep it reasonable and in-line with your industry’s best practices.
“Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations.” – Tim O’Reilly, O’Reilly Media founder and CEO