Raising capital can be a challenging process, especially in an economic environment marked by so much uncertainty and risk. But entrepreneurs often make the process harder on themselves by committing several common mistakes. Regardless of your industry or the size of your raise, here are five pitfalls to avoid.
Not asking for introductions. An entrepreneur's connections are his greatest asset, and 4 out of 5 leads typically come from his extended network. Don't psyche yourself out by saying you don't know any investors. Instead, schedule coffee meetings with the mentors, influencers, and thought-leaders whom you know to tell them about your business and get their advice. Ask them who might be interested in investing in your company and request that they put you in touch with them. You can't get what you don't ask for, and not asking your network for help is a surefire way to go nowhere.
Not working with a lawyer. People starting companies like to do things on their own. And they're often reluctant to spend money on advisors -- 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, but 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.
Depending 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. Same thing with the cap table. 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.
Not following up. Once you've had that coffee meeting with a prospective investor and sent her an invitation to your CapLinked deal room, don't just assume that your job is done. Investors will often take a while to start their due diligence, and for angel investors (who likely have another full-time job) there's a good chance that it might fall off their radar at some point. That's why it's important to make sure that you stay in front of your leads. Let them know your timeframe for needing an answer. And remember that it's OK to push them if they're reluctant to give you a firm yes or no answer.
Complicated deal terms. KISS (keep it simple, stupid) is a good rule of thumb in structuring an investment. Sometimes angel investors, especially unsophisticated ones, will push for complex deals that give them unusual rights and are loaded with stipulations. This "hair on the dog" 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.
Follow Eric M. Jackson on Twitter: www.twitter.com/ericmjackson
Not understanding that he who pays the piper calls the tune.
I have seen companies with excellent potential fall by the wayside because the founders would not give up any control to those who were willing to put up capital or bring in needed expertise.
This ties in with companies seeking outside funding far too soon.
Second mistake:
For businesses that have managed to obtain one or two rounds of capital: the founders using the funding to match the salaries they used to receive -- IBM mentalities in a venture world.
Third mistake:
Believe it or not, no business plan and lack of commitment.
Was just involved with a start-up law firm. Hard to believe, but the partners had no concrete business plan, no niche focus within their area of law, no idea about differentiation. One partner carried the firm; the second was seriously in need of a remedial time management course; the third would do anything to avoid practising law or engage in billable time.
All too often, the office would be empty -- all "working" from home, while their competitors worked in committed 24/7 offices.
The whole experience was a case study of how to fail.