There are multiple reasons for a startup to fail. The most common ones are the failure of products in the market, marketing, and human resources. However, cash flow and investment play a vital role too. Because with investment, the finest strategies are discussed in the paper. While there are many options for raising funds for a startup, the process could be better. So, let’s discuss the five most common mistakes entrepreneurs make when raising funds for startups and fundraising strategies to overcome them.
Five Common Mistakes to Avoid for Fundraising
1. Underprepared Pitch
Presenting a pitch is what gets the funds. It includes a pitch deck (presentation) and pitch. Pitching your startup to investors will lead to seed funding and significant capital. While startups perform best on the pitch, they sometimes need more thorough preparation to create a pitch. When we say preparation, we mean the data and information you put in a pitch.
2. Choosing the Right Investor
If you have ever invested, you must be aware of the struggle of picking the right investment tool. The battle of choosing the right investment tools like shares, MFs, bonds, and more is very real! The choice may vary based on risk, returns, taxes, etc. Similarly, choosing the right type of investor for a startup is crucial for securing funding. Angel investors may be of any other help if they have industry knowledge. 30% of the startups with venture capital funding fail (source). The failures could be caused by conflict of opinion, loss of ownership in making a decision, insufficient seed funding, and more.
When raising funds for a startup, consider a few factors to choose the right investor for startup fundraising. Equity ownership is one of the main concerns when raising funds for startups. So, if you want to keep your ownership intact, go for bootstrapping or crowdfunding.
However, if you are cool with giving some part of equity ownership of your startup, angel investing is perfect for seed funding. However, if you need significant capital and are okay with more equity dilution, you can opt for venture capital. Your fundraising strategy will change with the types of investors you want to target.
3. Wrong Estimates for Investment
One of the most common mistakes is wrong funding and startup fundraising time estimates. Startups often miss the right market, and investor researchers either ask for more or lower investment in turn of equity. Additionally, startups usually need to improve the timing to implement their fundraising strategy. They often raise funds for startups way too early or a little late. In both cases, there is a loss of opportunity and a waste of resources.
For optimum startup fundraising, you must do deep market research. Look for the resources you’ll need for startup, the equity share for investment, your financial needs, your target market needs for future trends, and other factors to decide what amount of investment you’ll need and at what time.
4. Unrealistic Projections and Valuation
Optimism is the key to making the startup last through the tough times. However, a thin line of four words can bring doom-days for your startup: over-optimism. Unrealistic project valuation and future projections are discouraging factors for investors. Being in the investment field for years gives them extensive knowledge and allows them to see through unrealistic predictions. It results in the rejection of funding requests and potential damage to your startup image.
Conduct thorough market research before drafting projections. Back your claims with data on market value and growth rate. Structure detailed plans on how you’ll achieve the projected position. Additionally, you can briefly explain how you’ve calculated your valuation and accommodate the investor’s insights to change the valuation if needed.
5. Overlooking Representation of the Organization
It is widespread for entrepreneurs to present their ideas and products at the start. However, it is equally common for them to overlook their team. As a startup, your team (however small it may be) plays a vital role in getting the trust of the startup.
While working as a one-person army sounds courageous, it discourages investors from investing in your startup. They are on the lookout for startups who are capable of managing their operations. So, rather than doing it all by yourself, trust an expert to perform operations with expertise. So, hire a core team to help you achieve your dream. When creating a pitch deck, mention how you have worked together like a synced machine to gear up your startup.
Conclusion
Raising funds for startups is one of the most challenging tasks for any entrepreneur. It is the pillar that keeps any startup tall in harsh market conditions. However, entrepreneurs often must correct a few common mistakes in their fundraising strategy.
We discussed five of the most common mistakes one makes when securing funding. The most common one is being underprepared for the pitch and needing to be more realistic in projecting your valuation. Both of these result from inadequate market research and internal data analysis. When you do your homework to understand market trends and your performance, you can create compelling pitches with realistic data to back your projections. Similarly, when you are underprepared, you’ll underestimate your investment needs.
Startups often choose the wrong investors to raise the seed and series funding. So, they must identify their financial and equity needs to select the right investors for their projects. Furthermore, when pitching, they should focus on highlighting their team to gain the investors’ trust to know that they have a tangible plan to achieve their goals.
Stay tuned with 21BY72 for more helpful startup content. We host a Global Startup Summit for startup fundraising and learning from industry leaders. Check out our visitors from previous years and activities to learn how startups benefit from this networking event, which has various exciting activities.
FAQ
1. How to find secure funding sources for startups?
You’ll need to network with the right people to secure startup funding. They can give you references for angel investors, VCs, and more. They can also help you improve your pitch and increase the chance of raising funds.
2. How do you create a compelling pitch to raise funds for a startup?
When creating a pitch, you must structure the pitch deck. You must include the basic things like your business model and its benefits to society, core team, performance to date, valuation based on market research and future projects, the goals you want to achieve, and how you’ll achieve them.
3. Are business plans necessary in startup fundraising?
Yes. A business plan or model states the necessary information about the business. It includes your product and services, production management, revenue management system, competition, etc. It allows the investors to determine the potential of your startup and your abilities to achieve the goals and become successful. Proper presentation of your startup or business plan can increase your chances of getting the investment.
