You read the story of the one in a million; the startup that immediately turns into a rocket and IPOs in 7 years. That’s the dream, right? But in reality, when raising venture capital, not even 10% of all startups make it.
The great majority, however, go through something more like this: have a great idea, check. Find a talented “team” of believers, check. Build a great product, find your market segment, screw up, learn, iterate, screw up again, learn more, iterate more, find something that works, double down on that, lower your CAC, improve your conversion metrics, find a “sweet spot” and start feeling good. You then go to the market to raise money and… crash out.
Times have become more challenging because of the recession (we even discussed this in a recent session) but irrespective of the time, keep this in mind: when raising venture capital, you will get rejected. Many times. So you might as well be rejected for the right reasons, not for things you could have easily avoided.
The best thing you can do to increase your chances of raising Venture Capital investment is to avoid the textbook mistakes startups make.
Common mistakes when raising venture capital for a startup
Is your business a VC business?
VC funds need huge (read: huuuuuge) returns to make it worth their while. That means they aren’t interested in anything that is not supersized in financial returns.
So your dream business that does $5m per year in sales? Sounds like a nice business, right? Well, not for VCs. As a median SaaS business with a valuation of around 30-50x revenue, $5m x 30-50, or $150-300m. VC firms own 20%, so $30-60m. If they invested a total of $25m for that 20%, that’s a nice multiple on capital, but nowhere near where they need to be.
That doesn’t mean you can’t raise investments or that you don’t have a fast-growing business, it only means that your business won’t be interesting for venture capital firms.
You’re not approaching investors strategically
The game should be played strategically if you want to win. Not all investors are equal – and you should prioritise them accordingly. If a good investor decides to invest in your startup, other investors will feel that they are missing out on something, rushing to try and close with you, too.
Choosing who to approach first – and how to approach – is essential when raising venture capital. The best way to do that is using the Pyramid of Priorities, explained in detail here.
You go to market when you need cash
The press and everybody will tell you that raising funds is quick, while the hard data shows you precisely the opposite. If you’re raising funds when you already need cash, you’re raising at the worst time possible.
We’re big fans of DocSend’s analytics of pitch decks, and looking through their hard data and reports, it’s easy to learn that an average round is 23 weeks. At the Fundraising Bootcamp, we suggest that you have at least (at least!) 6 months of financial buffer when you start your process. Plan accordingly.
Your pitch is poor
During pitch presentations, startups talk nonstop about them. Instead of focusing on what matters to investors, they constantly talk about their team, customers, growth timeline and all details about themselves. What’s in it for them? What VC investors care about more than product, features, or anything else is how they will get 100 times the return on their investment.
Investor decks are very calibrated, and we know what’s there. If your deck doesn’t have the minimum data points expected by investors, commonly found all over the web, that’s your fault. Some VCs are so straightforward they add those details on their website, so check first.
You’re not ready yet
There is no such thing as a casual chat – if you meet an investor, even in a casual setting, and the investor thinks you are “alright” you will never get an invitation to a proper meeting. That informal meeting is your last chance to meet that person. If you’re not ready to go all in, you’re wasting your only chance.
You haven’t dedicated enough time to raising venture capital
Seed rounds take 12.5 weeks on average (and much more, in many cases), at least 58 investor contacts, and 20 pitches. We see too many part-timers juggling product development, customer sales, and fundraising on the side and think that’s enough.
Fundraising is a full-time job. Doing a little bit on the go is even worse than stopping entirely.
Your idea doesn’t have a market
The world is full of tech solutions looking for market problems. Even at an early stage, founders insist on Product-Market fit.
“Make something people want” is Paul Graham’s quote that became Y Combinator’s motto.
If your product is still not usable, prove the niche, the need, the request, and how your idea is supposed to serve all this. Doesn’t matter how great your product is – if there’s no audience, you don’t have a business.
Having hustled for years and advised startups/scale-ups for many more, I have become jaded by the sheer amount of the same mistakes – it wastes everybody’s time, both founders and investors, and they can easily be avoided. Worst of all, now you have experts and self-acclaimed gurus giving free and terrible advice to founders, making them follow the hype and not learn about the practicalities of fundraising successfully
In 2020 I decided to solve it myself and co-created what we call the Fundraising Bootcamp today, an investment readiness programme that just works. I know the list is long, but it could be way longer. There are infinite mistakes, spoken and unspoken when it comes to presenting your pitch to investors. If you want to be genuinely prepared, join one of our next programmes.