Important Mistakes made by entrepreneurs while raising money
This is the age of Entrepreneurs – the ones who dream big about a brighter future for the world. With big dreams, come bigger challenges. According to statistics, only 10% start-ups are achieving success. The biggest challenge faced by young entrepreneurs is Fund raising. In the absence of proper funding channels, the best bet for an entrepreneur to raise money is crowd funding platforms. Crowd funding market is expected to grow up to 96 billion dollar. This article discusses 6 major mistakes which entrepreneurs make while raising capital:
a) Models with inflated valuation:
Unrealistically high future cash flows projected by start-ups during their pitch mostly used to go wrong. As a result nowadays investors are becoming more careful while pumping money to start-ups. Investors expect to see results within a period of 18 months after inception making fund raising tougher for entrepreneurs.
b) Absence of proper communication strategy:
Most entrepreneurs are amateurs who are not aware about the importance of having a robust communication strategy. Bulky and crude information content hardly gets the attention of investors. So proper guidance from professional are required. Equity investment platforms like Capital Pitch came up with investor centric templates for proper communication with potential investors. After signing the agreement, investor expects frequent and transparent communication. Also periodic meetings with investors to discuss on the strategies and challenges and for seeking their inputs are also of prime importance.
c) Commercial data not analysed by experts:
Historical market data, future financial projections and assumptions made, required capital to be raised, future valuations and cash flows, projected growth rate, sales and marketing plans etc are not tested and approved by experts. Today there are investment platforms which provide expert guidance to entrepreneurs regarding all these. They provide periodic review for key indicators like growth, profitability, Liquidity, leverage and activity and compare them with industry benchmarks.
d) Mismanaged data:
Once the deal is made with investors, investors would ask for documentations like intellectual property protection documents, non-disclosure agreements and various data regarding the company – employee data, resource data etc. Mixing up of this data can even lead to termination of the deal. In today’s scenario, investors are also asking for data regarding the key performance indicators of the start-ups on a weekly or monthly basis.
e) Difficulty in getting your lead investor:
Lead investor is simply your first investor. A lead investor is critical in various ways. He is the one who attracts further investments. So the size of investment he makes is also important. According to the figures provided by crowd funding platform, Seeders: Start-ups with 20% investment from lead investor succeeded 80% of time and those with 35% investment from lead investor succeeded always while those with 0% lead investor investment failed 75% of time. Lead investor should be business oriented in his investment and with good knowledge in the industry.
f) Building investor networks:
You cannot expect any unknown investor getting attracted by your pitch and starts pumping money for your start-up. Building relationships with investors is most important as investors would invest only if they find you trustworthy and capable. It’s not always about the idea, but it’s about the ability to execute. You should build relations with a network of investors through LinkedIn, networking workshops, crowd funding platforms, mentors etc before pitching your idea.
So the most important thing is to reduce the risks for investors. With proper measures to remove the risks for investment, Entrepreneurs would be able to instil confidence among the investors and attract more investments. With proper understanding between investors and entrepreneurs, fundraising for start-ups can be made easy and productive.