5 Critical Mistakes to Avoid When Raising Money With Investors

Business.com / Finances / Last Modified: February 22, 2017

Here are mistakes that many entrepreneurs make when working with investors. Avoid them with these tips!

Well, you did it.

You started a new company, and some outside capital would help propel it to the next level.

The problem is, you have never done this before. You’re nervous. You have read the horror stories or seen the sharks on "Shark Tank" chew some of those folks up.

You want to make sure you are not wasting your time. Do investors even want what you’re selling? Are there more efficient ways to approach the funding process?

Related Article: Internet of Things & You: Finding Investors to Fund Your IoT Startup

Here are mistakes that many entrepreneurs make and that you can avoid. 

Fundraising Before You Have Proven Successes

Most investors, even early stage seed investors, want to see a certain amount of business momentum before they are willing to invest. It is extremely rare for someone to invest in a concept. They want to invest in a business.

What makes it a business?

All new products are trying to solve a consumer or business problem. How do you know that it is an important problem, one that customers will pay to solve? How do you know it is the right problem?

You need to build a prototype of the solution and get it in customer’s hands. Get feedback. Do surveys. Generate revenue. Paying customers are the ultimate proof that you have a solution to someone’s pain. 

Having the Wrong Team

Investors are backing the founding team even more than the market or the product. Great teams often change their initial product, or move to a new market, like the Groupon founders or Twitter founders did. A common investor saying is “I’m backing the jockey, not the horse.”

You need to have the right team for your stage. If you are really early, like just finding product market fit, then you need a product visionary who can translate that vision into reality.

The investor is thinking “Can this team create a BIG company that will make me a lot of money? What do I like about them? What do I not like?”

If you have major gaps in your team or plan to make significant hires after the funding, make sure you address your hiring plans with the investors. 

Going After Too Small An Opportunity (For the Investor)

Investors all want to make a lot of money. How they define that depends entirely on their own circumstances. A $500 million venture capital fund is totally different from a small angel investor in what they consider a lot of money.

The VC will want to see a market opportunity that can produce a Billion dollar business. Even if that type of fund does early stage seed investing, they don’t care about making 10x their money on their seed investment.

How can they not care, you ask. Because returning $10 or $20 million to a $500 million fund is irrelevant. It’s noise. It’s not worth the effort. The only reason they do seed rounds is so that they can do the larger A and B rounds. They want to return $100 to $500 million from a single successful investment.

If you are not shooting for that kind of outcome, either because your market isn’t large enough, or because you are out to create a nice company, not to change the world, then you should rethink going after VC money.

If you think your business has the chance to be a game changer, think through a few different scenarios of how that could play out. Describe them in your pitch deck. No one is going to hold you to one specific path, but they do want to know that you are thinking big.

Related Article: 6 Crowdfunding Tips to Attract Investors (And Their Money)

Approaching the Wrong Investors

Most investors have a sweet spot for the types of companies they invest in. You need to research their sweet spot and make sure your company is a good fit. With angels, there will be particular products, markets, or types of technologies they prefer. Some will invest in health care companies, others in technology, still others in consumer businesses.

With a VC fund, they also have vertical market focus but also stage focus. Smaller funds typically do smaller and earlier rounds, while larger funds do larger, later rounds. There are some exceptions, but you want to avoid them so you can be efficient.

You can research what angels and VCs invest in through platforms like Angel List, TechCrunch’s database and directly on their websites

When you get into the process and find investors who are starting their due diligence on you, you need to do some as well. Ask around among their CEOs. How does that investor behave in Board meetings? What about when they get bad news?

This is a long-term marriage, so make sure it’s a good fit.

Not Knowing What Your Milestones Are

The funding that you raise is probably not going to be the last amount you need. Since capital is almost always raised in various rounds, you need to understand how far this money is going last and what you plan to accomplish with it.

You need milestones. You should talk with your advisors, attorneys, and other investors about what they think the critical milestones will be for you to raise your next round. Your milestones could be related to making one or more critical hires for your management team. Your milestones could be related to a new release of your product. They could be related to a certain revenue level. Your milestones could be proving out certain aspects of your business model, like getting your cost to acquire a new customer below a certain level.

Be patient. It’s a process.

It probably sounds like I’m oversimplifying. After all, you still have to produce a pitch, practice it, and get through the long fund raising process.

But if you have a good story with lots of customer proof, you go after the right investors, and your team can get you to the next level, you will have success.

Related Article: The Do’s and Don'ts of Pitching to Investors

Remember that fundraising isn’t a destination, it’s just a catalyst. It is just fuel for the car.

Avoid the critical mistakes, make some changes if you need to, and you’ll get there.

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