A few months ago I wrote about “How Entrepreneurs Swing And Miss At The Funding Pitch.” It describes several ways funding pitches miss the mark. However, there are plenty of other mistakes entrepreneurs frequently make when raising venture capital. Most are easily avoided with forethought, coaching, and some insider tips.
1. Basing Your Funding Needs On Time
Time is not a milestone or a creator of value. Meaningful milestones that take risk out of the business, such as proving out product viability, assessing customer demand, or validating a business model are the things that create value. From those key milestones, you can derive the needed resources and time required. When an entrepreneur tells us the money will buy the company twelve months, it says they don’t really understand company building.
2. Asking For Too Much
Venture capital at the early stages is very expensive. You should never take more than you need to meet your goals and milestones for that financing. It’s a bit of an IQ test for an entrepreneur. And it’s pretty rare when a startup team with excess capital spends it all wisely – it’s just human nature.
3. Asking For Too Little
Yes, there really is such a thing. Most VC investors, especially those with their own company building experience or many years in the business, have a pretty good sense of how much capital it takes to accomplish a set of milestones. If you are well under that expectation, it suggests you don’t know enough about building and running a business to be trusted with the capital. And if the capital does turn out to be too little to achieve the required milestones, both the entrepreneur and the investor are going to pay the price, the entrepreneur most of all — the capital required to keep the company afloat in order to complete the milestones will be even more expensive than the prior capital.
4. Unrealistic Milestones and Timeframes
Starting a company and making it into a valuable enterprise requires equal parts daring and pragmatism. You will have to do and deliver things that many people think are very difficult or unrealistic – otherwise it probably would have been done already. At the same time, you need to have a solid rationale for why you can deliver the improbable, be it through unique insights, skills, experience, or technologies. But milestones and timelines that are mostly or all clearly impossible, defy physics or are obviously naïve are a strong indicator that your dream is just that, a dream, and always will be just that.
5. Saying It’s Hot When It’s Not
While setting a price and getting a term sheet offer is a negotiation, it’s a subtle, cordial and trust-building process, too. We are going to have to live with each other for many years. If you try to create an impression that lots of people are chasing your deal, and you expect term sheets in three days, it better be true. There is nothing sillier, or more damaging to that trust-building process, than an entrepreneur calling a week later, still with no term sheets in hand, and “checking in” to see where we are in the process. Being dishonest about timing and interest is just that – dishonesty, not clever deal strategy. You may also chase us from the process, if we decide we can’t do our diligence and make an informed decision in the artificial and false timeframe you set, leaving you with fewer choices.
6. Using an Agent
An entrepreneur needs to be able to pitch his or her business to all forms of constituencies, and will almost surely need to raise more capital after we invest. If you need an agent to help you raise capital in the early stages of a startup, it’s a pretty telling sign you don’t have the entrepreneurial chops to build a successful business. See Checklist Blog for a list of “chops.”
7. Asking For an NDA
Venture firms never sign NDAs. So don’t ask. It just makes you look like you are a newbie. Should you worry? Not really. Reputable long-standing VCs aren’t trying to steal your ideas; we get paid to do something else by our investors. We also have a reputation to maintain, and we won’t be able to maintain it if we are trying to steal or share your ideas. We also aren’t going to sign an NDA because we see far too many business plans and ideas – many we have seen a dozen times before in some form or fashion.
8. Bringing In a Bunch of Other Small Investors
We don’t have anything against your mom, or angel investors who bring tangible value to the enterprise. But every person you add to the cap table is someone you are going to have to manage in the future, seek signatures from every time you do a financing or otherwise modify the corporate structure, and potentially have to deal with if they become unhappy for whatever reason. It’s always better to minimize the number of investors or shareholders you have, especially at the early stages. I have seen financings drag out for weeks or months as the CEO/entrepreneur valiantly tries to herd the cats — often when the company is rapidly running out of money. No one needs that stress, you most of all!
9. Presenting a Friends and Family Team
Again, we don’t have anything against your sister or brother, or your college roommate, IF they are truly the best and most qualified people you can attract at your stage of development. Too often, an entrepreneur will show up with a team comprised of their buddies or family members that clearly don’t add much value to the journey they are starting. Exiting them from the company when the entrepreneur can no longer afford the opportunity cost of a weak team member will be a painful and sometimes nasty process that will take too long and create too many distractions when all hands and eyes need to be on building the business.
10. Presenting a Team Overloaded at the Top
Every once in a while an entrepreneur throws up an org chart for a twelve person company with a CEO, a president, and eight VPs. Unless the entrepreneur is a rock star and has attracted proven seasoned executives who are capable of rolling up their sleeves and doing the dirty work early in a startup, this is a big red flag.
11. Presenting a “Contingent” Team
Another team slide, another mistake. If the team chart is filled with names of people who will join “as soon as we raise money,” it’s a pretty good indicator that the entrepreneur isn’t a compelling leader and evangelist who is able to get people to make the hard sacrifices necessary to build a startup. And who wants to give money to a team that doesn’t believe enough in what they are doing to quit their day jobs and go make their dreams a reality?
12. Understating Competition
“We have no real competition.” Really? Then why is there a market opportunity? Every valuable market opportunity has competitive alternatives or substitutes. If you don’t know your competition and the customer’s view of the alternatives available to them, you aren’t ready to raise capital yet.
I’m sure other investors have their own favorite list, but these are some of the most common fundraising mistakes I see.
For more on this topic from a “what to do” point of view, check out Rob Bernshtyn’s blog posts on raising money –here and here. Rob is the CEO of Coupa Software, and one of the best young entrepreneurs, CEOs and fundraisers in Silicon Valley.