At The Startup CFO, we are passionate about transmitting good startup practices to help budding entrepreneurs on their journey to tangible success. In this post, we are going to look at the top fundraising mistakes startup CEOs make. The investment environment is sometimes intimidating to those businesspeople who are still learning how the startup environment works, while other entrepreneurs may approach fundraising with an over-confident approach.
It’s safe to say that fundraising is a necessary process for many startups and one which brings excitement and the prospect of much needed external capital. However, the process must be approached with knowledge and caution. Let’s get started!
1. Entrepreneurs who seek an unrealistic amount
As we’ve mentioned in previous posts, sound financial advice is vital to success when it comes to approaching investors. It’s worth remembering that investors and venture capital firms boast a wealth of experience and a plethora of cases to draw upon when making investment decisions, and this knowledge and experience is often something new entrepreneurs find they lack at the beginning of their startup journey.
It’s important to approach a round with very clear ideas about the amount of money you are going to ask for and what it’ll be used for.
This knowledge should be based on expert advice and sound projections to avoid asking for too much or too little capital, while also securing a realistic sum that will help the business grow. The key is providing concrete justification for the amount you need to raise.
2. Inability to delegate thus suffering the impact of a funding round
CEOs often underestimate the time-consuming nature of funding rounds, failing to realise that the process can often remove them from the day-to-day running of a company for a considerable period of time. Before approaching investors and entering a funding round, CEOs should ensure they can count on a solid team of colleagues or staff to help them through the process with everyday business needs.
The excitement felt by new entrepreneurs setting out to raise funds mustn’t be overshadowed by business needs which can ultimately affect metrics and overall performance.
CEOs should therefore bear in mind that they will need to disconnect from day-to-day matters for a length of time and leave others in charge. A huge number of startups have suffered real consequences in terms of plunging metrics during the fundraising process, particularly when CEOs are required to take a step back to engage in intense rounds.
3. Underestimating timeframe
Bear in mind that a typical funding round might last anywhere between 6 to 18 months, with 6 months sitting at the minimum end of the scale. Entrepreneurs sometimes take a naïve view of funding, believing that it might take a month or two at most, and this couldn’t be further from the truth. Therefore, we recommend that CEOs take realistic timeframes into account and take precautions to ensure that the business isn’t jeopardised in their absence.
4. Raising money with the wrong investors
Finding investments in the right places is crucial for the success of your company. Although money is important, experience often reigns supreme when it comes to growing an early-stage startup. The right investors will show a keen interest in your project and genuinely want to help it grow for the benefit of their investment and the future of your startup. Getting into a funding round involves finding the right balance between the type and amount of capital you need to raise and the genuine insight of the investors you plan to partner with for your funding effort. Want to know the moral of the story? Work with investors who understand what makes your business tick.
5. Ignoring the wider benefits offered by investors
Fundraising is all about the money. However, entrepreneurs often fail to look at the bigger picture and reap the rewards of the acumen, knowledge, track record and passion provided by investors.
Considering the time and effort spent in preparing for and participating in a funding round, it’s certainly beneficial for investors to seek a close partnership with likeminded investors who fully understand and feel motivated by the startup’s business plan, while ultimately working to maximise its future success.
6. Not seeking sound legal advice
Fundraising can often be a legal minefield. CEOs should bear in mind that contracts and agreements often contain numerous clauses and extensive text which must be fully agreed to before signing. These situations make it essential for startups to fall back on professional advice and support, which is where an expert and well-versed corporate lawyer becomes essential. At The Startup CFO we always recommend investing in expert advice, and even more so at the initial funding round stage.
7. Lack of good follow-up and reporting with investors
Another frequently overlooked professional area is expert CFO management. When seeking investment, CEOs will be expected to pitch and thoroughly explain a detailed business plan, reports, and forecasts. This wealth of information requires careful planning and professional guidance by a CFO with experience in the startup environment and a track record in supporting companies through their early funding rounds. As yo have seen, there exist a lot of fundraising mistakes startup CEOs make. Because of this, at The Startup CFO, we offer comprehensive support to entrepreneurs looking to enter into their first funding rounds, including thorough business plans and reporting.