Here're couple of more points...from the entrepreneur's perspective.....learn to be humble and how to sell your idea....investors aren't stupid and know lot of people just as smart as you are who have failed.
From the investor's perspective....I run from people who KNOW that they
will succeed routinely underestimate the level of difficulty involved.
The school of hard knocks is a great teacher as long as you're not too old when you graduate.
Every entrepreneur has heard some sort of horror story about someone who has had their company stolen from them by ruthless VCs, or who was unfairly pushed out by a board that "just didn't get it."
The reality is that investors are investing in you as much or more than they are investing in your idea. They desperately want you to be successful, and certainly don't want the headache of replacing a management team. That is an action of last resort.
For every entrepreneur who really was pushed out unfairly or had their company stolen from them, there are about 100 entrepreneurs whose investors and boards tried desperately to nurture but who refused to accept pretty reasonable advice.
As an investor I find that the most common misconceptions when raising capital are related. The first is that the team can manage the project without significant assistance. This is rarely the case. The second is that I should give them my money with no control or strings attached. As one entrepreneur put it, "The way it works is you give us money and we get to spend it!"
In reality, I invest in plans and want to approve or disapprove of those plans. I am not writing a blank cheque (except in some situations). If you want investment, lay out a definitive plan, with milestones, and costs. Then don't deviate unless you speak with me first. If you do, then the next round will be very difficult unless you were very right. Too many entrepreneurs look to successes as their guide. The reality is that the hard slogs are the ones to emulate because they made it through without easy success.
Need to submit a full blown business plan immediately as your "pitch" to gain interest. Quite honestly a 3 page or so summary with the important facts and goal is critical to success and its amazing how many beautiful and full plans are submitted. All information for the lender is there and great additional information, however lender wants direct response and statement of needs and use of funds and thumb nail sketch before full project will get total review.
The most dangerous misconception is that you will retain control of the business. The elephant in the room is the fact that the majority of start up CEO's get fired within 3 years as the investors bring in more experienced management as the business grows. With some VC's, the % is considerably higher.
Do your due diligence and ask the question!
I don't believe I can definitively say one thing is the biggest misconception, but for sure two big ones are as follows. Firstly, that equity is cheap. It's actually the most expensive form of financing. People consider it to be cheap because it has no monthly operating cost, but what is half the company worth in 10 years, for example, if you are as successful as you think you will be? Secondly, that the ultimate answer is to have a bank loan, as that's a cheap way to get money. If only we had a bank loan. In my work in trade finance, I have seen so many companies choking to death from a cash perspective because they can't get enough cash, the bank can't/won't increase their line of credit and the bank has taken all assets as security. My current belief is that only mature companies with solid retained earnings and not a lot of growth are a good fit for a line of credit in most cases. Otherwise businesses just run out of cash and unless they are willing to give up the bank loan and choose other solutions they just can't make things work.
The most common misconception is that ... If you have a great IDEA and can put it into and elevator pitch an Angel or VC will give you money.
No one (except a fool) will provide money until -
1. THEY KNOW YOU WELL ENOUGH to TRUST YOU.
2. You have MORE than an idea
(i.e. someone will buy something and you can make money selling it )
3. it can scale and they can make 6 - 10+ times there investment back in a reasonable time
4. they perceive you can make this all happen (without their help)
IF all this is TRUE - YOU need to be choosing them as investors and for what THEY bring to you and not the investor choosing you!
THAT is how you will raise Capital!