10 Mistakes Entrepreneurs Often Make When Raising Capital

    Andy Cars

    Guest post by Andy Cars, CEO of Seedcap. Andy evaluates hundreds of business ideas each year giving him an in-depth understanding of what it takes to succeed in a global market.

    Seedcap AB help entrepreneurs and start-ups to raise capital.  Here’s Andy’s 10 Mistakes Entrepreneurs Often Make When Raising Capital.

    1. Trying to raise money too late
    Raising money is time consuming. Count with an absolute minimum of 3 months, with a more likely scenario being 5 – 7 months.

    raising capital

    2. Trying to raise money too early
    There should be a logical relationship between the perceived value of the company in need of cash and the amount of cash to be raised. Trying to raise significant sums simply based on an idea usually fails, which leads us to point 3 below:

    3. Lacking a realistic assessment of the companys’ value
    Some entrepreneurs seem unaware of what drives value and ignore the importance of building some form of substance before approaching investors.

    4. Not building enough substance before approaching investors
    Investors tend to look at the following factors when determining the value of a venture:

    • Team, advisory board and board of directors
    • Strategic partnerships
    • Customers and customer value
    • Prototype/proof of concept
    • Immaterial rights/protection
    • Scaleability and market potential

    The above is often overlooked by entrepreneurs whose main focus is to single-mindedly communicate their “unique business idea”. Before approaching investors ask yourself what you can do right now to build substance.

    5. Not splitting the message into smaller chunks
    Although having an impressive business plan is often a requirement for obtaining financing, the importance of creating a variety of pitch materials that are tailored to the different stages of the communication cycle, is often overlooked:

    • The 15 second “elevator pitch” – everyone knows about it but hardly anyone is good at it.

    • The “Executive summary” or “Flyer” – before sending a business plan send only the flyer. If the flyer does not catch the investors interest the business plan certainly will not.

    • The 10 minute power point – excellent for communicating in a crisp and clear manner the most important points of the business proposal during a first meeting with potential investors.

    • The investment memorandum – also called “private placement memorandum”. Business plans lack a concrete offer to investors. This is addressed by the investment memorandum together with a clear description of risks and the terms of the investment.

    Splitting the message into smaller chunks make it easier for investors to digest it.

    6. Preparing poor pitch material
    Preparing poor pitch documents that raise more questions than answers is all too common. Here is a small sample of mistakes to avoid:

    • Ignoring the importance of the team, board of directors and advisory board. Most investors choose an a-class team with a b-class business idea before a b-class team with an a-class business idea.

    • Ignoring your customers. Not talking to potential customers early on is a very common mistake. A true entrepreneur will always include the customer in the development process. The inventor is usually the person shutting himself off from the world to develop the most brilliant product on the planet that in the end no one wants.

    • Ignoring to clearly state how to reach the market. Simply stating word-of-mouth is not enough. Also, defining future market share as an imaginary percent of the total market instead of basing future potential market share on product offering, budget and planned marketing activities.

    • Ignoring the competition. If there is no competition there is usually no market.

    • Ignoring hidden agendas. There are plenty of inventors who have become bitter because the world does not understand how amazing their product is. Although the product may be great and offer true value to the consumer, there may be hidden agendas preventing the product from catching on. For example, any product or service that shifts the power balance within an organization cannot simply be pitched based on value to the end consumer.

    • Ignoring your strategic partners. Gaining market acceptance and quickly building a significant user base is usually not possible without strategic partnerships. How much time do you spend on building your strategic partnerships within manufacturing, distribution, marketing and sales?

    • Ignoring the importance of scaleability. What can you do to improve scaleability?

    • Ignoring the international market. Sweden is not large enough. From day one think and define your potential international markets.

    • Ignoring future milestones. Be clear on what your milestones are and what you need in order to achieve them. Investors will hold you accountable with regards to the milestones that you set. Make sure to make them realistic.

    7. Pitching to the wrong investors
    Try to establish contacts with financiers who have deep enough pockets so that they can participate also in round 2 and 3. Be clear on what type of investor you are looking for and what you expect from them in terms of how long-term they are, their competence, network and cash and time that they are prepared to invest.

    8. Not pitching at all
    Being overly careful about communicating the value offering to others thinking that they will “steal the idea”. Again it is not the idea that is the most important but the successful execution of the idea that matters. While taking immaterial rights into consideration, talk to as many as possible to gain further insight into how to further develop the business idea and business modell. Also, be open to forming strategic partnerships.

    9. Getting too greedy
    Getting the right kind of investors onboard can be the difference between make or break. Be prepared to give up around 20% during round one. However, offering more than 50% during round one probably means that you are looking for too much money too early. According to the Swedish Companies Act an owner with at least 10% of the shares has the right to demand an external audit of the company’s books and cannot be forced to sell his holding. That is why it’s often referred to as a ‘corner’. In addition, investors usually demand a seat on the board as well as preference shares that grant the owners several rights compared to common (founder) shares.

    10. Not willing to share risk
    Investors tend to favour those who put their money where their mouth is. Entrepreneurs who want “out” by trying to raise money to pay off personal loans normally end up with nothing. If the entrepreneur shows that they do not believe in the venture why should the investor?

    I will delve deep into the differences between ‘preference’ and ‘common’ shares in a later post. If you want to learn about an alternative to offering shares during the seed financing stage read my post Alternative to company valuation for startups.