10 Common Startup Fundraising Mistakes & How to Avoid Them
One of the most exciting and challenging periods for a company is when it raises startup money. To help their company grow, the CEO looks for investors, loans, grants, and other sources of finance. If the firm is successful, it will have the money to keep developing its products or offering customers additional services. If not, the business might have to close its doors permanently.
What is startup funding?
Startup fundraising is the process of raising money to support a business idea. Depending on the organisation’s maturity, the funding sources vary, but the vast majority of enterprises engage in some sort of fundraising to expand their capacity for growth.
There are many ways for companies to raise capital. Funding rounds, or the process of obtaining money from outside investors, are the fundraising that is covered in the press the most. In those situations, investors exchange cash for equity or stock in the company.
Most investors swarm to high-potential companies, but the funding has a catch: they usually get a stake in the company for half the price and are actively involved in corporate decisions.
If owners don’t want to involve outside investors, they can get capital through small company loans. Although you can keep full ownership of your company, loans need immediate repayment, so they aren’t the best option for a startup with a tight cash flow. If your business is profitable, you may be able to find loans from conventional banking institutions or online lending businesses.
Founders who opt not to submit a startup funding application mostly choose to bootstrap, or self-fund, their businesses. They employ personal savings or money from friends and family to launch their businesses.
Bootstrapping is divisive, but it does help founders keep control of their businesses rather than selling ownership to investors and forgoing loan interest payments. The negative? The founder may lose their savings or the savings of their friends and family if the firm fails.
How Startup Funding Works
Now that you know the fundamentals of funding, let’s go through how the founder, the investors, and the business interact during the usual startup funding process.
In addition to seeing a return on their investments, investors want to assist companies in which they have faith.
Before moving on to Series A, B, and C rounds, companies seeking outside capital typically start with a seed round. Before any rounds can begin, a company must be valued. When assessing a startup’s valuation, factors like maturity, management, market size, performance history, profit, and risk are considered. The types of investors that are interested in the company and the quantity of new capital it can obtain may be impacted by these factors.
Once the valuation is complete, startups can start a funding round. Depending on the business, some founders may spend months searching for investors, while others may complete a round fast.
Additionally, although some businesses raise capital gradually through each investment round, others do so much more swiftly.
Startup Funding Rounds
It can be confusing to look for additional funding. Look at each investment round and what it means for entrepreneurs, businesses, and investors.
Pre-seed funding, which is not a typical round, is provided to founders while they start their companies. It’s the first stage of funding a firm and often involves an investment from the founder’s personal funds, family, friends, backers, or a network of other business owners. While a corporation establishes its foundation, years may pass. Or, if a company can establish itself, things can move along very quickly.
Seed funding is the initial formal investment made by the company, and it includes equity. This capital helps a business finance its initial activities, including market research, product development, product launch, and advertising to a specific audience. Think of this stage as the “seed” from which the rest of the company can develop and expand. Without it, a founder could not hire a crew or test their product on the market.
Family, friends, angel investors, incubators, or private equity companies can provide seed money. However, the sums raised vary greatly; some businesses raise $10,000, while others raise $2 million. A seed round values businesses between $3 million and $6 million.
Series A Funding
Once a business has used its seed financing to create a product and build a clientele, it might be time for a Series A investment round. This funding is commonly employed to broaden a company’s product selection, attract new customers, and develop a long-term growth strategy.
Therefore, established private equity companies like Sequoia Capital, Greylock, Accel Partners, and others invest in startups during this investment round.
Series A round funding can range from $2 million to $15 million, but high-growth companies have raised significantly more money during this stage due to rising tech industry values.
Series B Funding
Business development and achieving the next growth stage are the main topics of Series B financing. By adding new employees and increasing sales, marketing, tech development, and customer support, the money acquired in this round supports an existing customer base.
Series B rounds raise $33 million on average for companies with a $30–60 million valuation. The same high-level investors as the Series A round and later-stage investment companies are mostly drawn by a greater valuation and a tested company model.
Series C Funding
Successful startups need further capital to help develop new products, acquire other businesses, expand into new areas, or hire a top-notch executive team to participate in Series C funding rounds. Due to the lower risk of this round’s investments, additional investors have joined the round. The funds will be used to scale the operations of the firm so that it can grow as quickly as possible.
Investment banks, hedge funds, private equity firms, secondary market groups, and other businesses that fervently hope to make a name for themselves in the world of successful investing can all be considered. Companies in the Series C stage use this investment to boost their revenue before going public, with an average valuation of $118 million or higher.
Series D and Beyond
After Series C, few companies raise Series D or E rounds. those who want to raise money in a final round before going public or who require additional funds to finish the activities they had in mind for the Series C stage. A company at this stage of funding should have a reliable client base, dependable revenue streams, a track record of growth, and a clear plan for utilising more capital.
Following are the 10 Common Startup Fundraising Mistakes & How to Avoid Them
1. No clear vision or purpose
Too frequently, people jump right into their bright ideas for solutions without analysing their motivations or the kind of change they hope to bring about.
A startup might sputter along without much momentum if it has a defined goal. You won’t have much to rely on to keep you and your team going when times are tough (which they will be). A defined mission gives your actual business significance and gives people something to support. Spending effort developing and explaining this can provide your brand actual weight because it gives it a purpose.
Customers will warm to you and pay attention to what you do and how you do it if they share your purpose, thoughts, and direction. Concentrating on the “why?” in business can forge much stronger bonds with our customers and increase the likelihood that our startups will succeed.
2. A lack of focus
Startups are notorious for trying to do too much too soon if there is one thing they are frequently guilty of. It’s easy to explain your product and who it’s for if you have a clear focus. You may wind up with a complex, bloated product if you try to appeal to everyone and add left, right, and centre features, which will muddy your message. Take inspiration from companies like Dropbox and Instagram by focusing on one thing exceptionally well.
It’s harder than it seems. There may be pressure from customers, investors, or other team members, but if you want a viable product, you’ll need to learn how to say no. Make life much easier for yourself by getting the core correct.
To stay on course and maintain focus, discipline is a necessary quality that all successful businesspeople appear to possess.
3. Design as an afterthought
Startups make the mistake of ignoring the importance of investing in design. This is a chance that was lost.
The startup industry has a culture that prioritises technology or solutions over people, while one should put customers’ needs first when developing goods and services. Even though things are changing, startup owners still need to be informed about the competitive edge that well-designed goods and services may provide.
It has been shown that loyalty and a good user experience go hand in hand. Happy consumers tend to spend more, shop more frequently, and refer business to others. Design directly contributes to free marketing by fostering positive word-of-mouth. People are more intelligent than they were even five years ago, and if a better option is available, they won’t put up with a product or service that is badly designed. Since customer experience is how most people interact with your brand, it is crucial to work hard on this. They’ll never return if it makes them feel bad (or, even worse, use their network to harm your brand through a bad review).
4. Building something nobody wants
The ideal product is simple, compelling, and consistent with the business strategy. Even though they look attractive and seem to offer a pleasant user experience on the surface, websites and apps lack any clear benefits for the user as you use them more and probe deeper. Either the issue they’re trying to address does not affect many people, or the suggested remedy doesn’t strike the appropriate chord to be accepted widely.
Before improving the experience, be sure you’re creating the ideal product for your target market. Have a discovery phase before you construct your product, so you may research the market, evaluate your riskiest audience assumptions, and look for other, possibly more lucrative options.
Without thoroughly evaluating the founders’ assumptions, which underlie most business concepts, you drastically lower your odds of success. Simply by communicating with their stakeholders and customers more, many business disasters may have been prevented. You must locate a valuable and appealing product. Building something before you have proof that you have identified the ideal product makes no sense.
5. Chasing investors, not customers
Just because you have a great idea doesn’t guarantee that it will be funded. Having a business plan that helps the product to pay for itself is one of the most reliable ways to guarantee the longevity of your startup. Some so many entrepreneurs are overly preoccupied with developing a pitch rather than a company. Find a customer who will pay for your goods instead of seeking funding.
Concentrate more on outlining your product’s vision and narrative if you seek financing than the (made-up) numbers. If you’re a true entrepreneur, you should focus more on creating a fantastic product and maintaining a pleasing customer base than on external factors (chasing VCs, angel investors, etc.).
6. Too much talking, not enough listening
Early-stage companies may excel at honing their sales pitch since funding is so crucial to their success. Excellent if you’re searching for finance, less so if you’re trying to find a product-market fit. You run the risk of missing chances that could occur from simply listening to what others have to say if you don’t have a tested business plan.
Although sales are a startup’s lifeblood, the secret is to comprehend your customers’ concerns before making a sale thoroughly.
7. Launching too late (or too early)
Too many startups hide away from prying eyes in “stealth mode” for months (or even years in some situations), never release anything, and let uncertainty and rivalry ruin the show. In true lean startup fashion, others release a subpar early version of their product. But don’t release anything if it’s not “minimum fantastic.” To ensure the desired result, ensure that all features adhere to a minimum standard of design and usability. Finding the ideal balance between starting early and producing the ideal product is no easy task, but it could be profitable.
Your initial release is only the start, not the culmination. Don’t throw features at it; instead, take lessons from real-world usage and continue to iterate and improve.
8. Failing to ask for help
Entrepreneurs are a stubborn group. There is no harm in seeking assistance early on, but not enough people do. Some gurus genuinely care about helping you rather than just lining their wallets. Why make mistakes on your own when those who have gone before you may point you in the right direction?
Recognise your limitations and seek assistance if needed(or even before). Being an entrepreneur can feel isolating, but the more you discuss your company’s difficulties, the more prepared you will be to seize chances when they present themselves.
Spend some time locating a mentor who cares about the success of your business. Find the right person, and it can be a win-win.
9. No growth plan
If you build it, people will come. Or not, which is more often the case. Any startup’s success or failure ultimately depends on customer acquisition.
Serial business owners know that sales and marketing make up 90% of entrepreneurship, but growth hacking is the new kid on the block. Although there is utility in growth hacking, it has a vibe similar to the lean startup movement in that everyone will be claiming to be a growth hacker now that it has a “brand.”
Any company founder’s aim should be to discover a market for their product and access a larger market so that scaling is feasible. Finding customers, generating substantial traction, and hitting the tipping point are the other parts of the journey that we don’t typically hear about. Even the greatest product ever created is only half the tale. Every successful product has engaged in some kind of hustle to advance. To gain traction, Airbnb is known to have stolen listings for homes and apartments from Craiglist from property owners. What are you doing to promote awareness of your startup and increase sales? Be brave and astute.
10. Hiring badly
Early-stage startups sometimes make the error of employing staff before they clearly understand the type of individual they are looking for. You probably won’t meet your long-term business partner at a co-founders speed dating event, just as you probably won’t meet your future spouse in a club. It all boils down to identifying your startup’s genetic makeup. You’ll be able to locate the kind of individual who will fit in well if you have a compelling vision, narrative, and set of values that motivate you. No talented developer/designer/hacker will want to work until they sweat unless they have a real bond with you and believe in your startup purpose.