This article has been written by Yash Shivalkar, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
Table of Contents
Introduction
The life of an entrepreneur is no less than a roller coaster ride. They go through a wide range of ups and downs in their journey. The greatest challenge an entrepreneur faces is the wild hunt for funding and to a rookie entrepreneur it’s the hardest task of all. But the downside to entrepreneurship is that it is easier to make mistakes at fundraising than do it right. A first-time founder in most cases is easily subjected to a plethora of mistakes. A rookie founder believes in his product/service and is ready to turn it legit with an elaborate business plan but the focus is too much on the product in the initial days, to such an extent, that the most important aspect of turning a vision into reality is often overlooked and under-planned: fundraising.
Running a business can very well become a nightmare if not handled the right way. It is more of a team sport rather than a one-man army job. Along with your business idea, you must have a team in place that would chart out the plans for going ahead with funding. A well-founded team is the core that would give a new entrepreneur the perseverance to move ahead with his / her goals. It all boils down to one rudimentary function: Research.
There exist a tonne of mistakes that one can make while seeking funding and, in this article, we shall discuss the top 10 mistakes an entrepreneur is prone to make whilst seeking funding.
Valuation of your venture
The problem with rookie entrepreneurs is that they tend to undervalue / overvalue their ventures. This is a common problem that persists especially with new entrants into the market. The valuation of your venture, even if it is self-valuation plays a key role in charting the roadmap to the future.
The truest value is the minimum amount that an investor would be willing to fund and any additional valuation by means of self-valuation or any other means is merely nominal. Entrepreneurs overvalue or undervalue their ventures which creates a delusional net realised current value and affects their business model.
A business model shapes up your entire pitch that an investor evaluates and now both overvalued models and undervalued models would give the portrayal of excessive investment costs or no profit margin to the investor respectively. A true to life valuation will not only help the founders create a more articulated business model but will also help the investor to better understand the pitch with a promise of future profit margin and affordable operational costs. A realistic valuation should be done by taking the economic sentiments of global markets and with a holistic approach to all relatable conditions.
Research on venture capitalists and future business prospects
The kind of investment portfolio a VC (Venture Capital) firms has is of utmost importance. An entrepreneur would not want to accept money from a hostile VC firm. Research on the firm’s investment history and have an outlook of what the status quo of those companies is. Effective due diligence will save you from entering into a potential bad deal. Research should not be limited to pre-deal only and any contract or agreement put forth by the funding firms should be read multiple times with utmost scrutiny. This brings us to our next point below.
Legal counsel
Every start-up must invest in a competent legal counsel that can guide and provide direction to the venture’s future. All entrepreneurial and industry-related laws have to be complied with to avoid any penalty as a fine, which may be hefty depending upon the level of non-compliance, may prove daunting to the start-up. A good legal counsel is not limited to compliance. As mentioned in the previous point, funding firms have a lot of high monetary business transactions that they do on a high frequency which is why they have the most competent legal counsel at their disposal.
A start-up lacking good legal counsel may be easily exploited by VC funds or private equity investors and the founder may end up losing his venture to such high-net-worth investors. A good legal counsel will also ensure no future potential disputes arise in any other deals that the start-up may enter.
Delusions about the time period to find the right kind of investor
The process of running a start-up is truly taxing and may most likely lead to impatience due to the inherent fear of failure in most individuals and especially rookie entrepreneurs. The goal is to find the right investor that is comfortable and acquainted with your business model and is aware of the time period that the start-up may take to utilize the raised capital with efficacy. There are multiple investors that look for quick profit margins and are not willing to be patient and this is exactly what a smart entrepreneur wants to avoid. So proper research and waiting for the right opportunity is crucial and one must not force fundraising to get quick capital gains. In addition to this, the process of VC funding has a lot of steps on their end which may add a few more days/ weeks by itself. So, patience is virtue.
Bad attitude or fear
As much as the entrepreneurship culture is celebrated in today’s generation with social media and millennials abuzz with motivational quotes and their empowering tales of success, there always exists an inherent fear of failure in the minds of all founders. Different people have different degrees of this fear. A mere thought of failure to occur is only natural. How one reacts to it is crucial. An entrepreneur must have high morale and a strong mind to overcome such thoughts. One must also have a mind of patience and perseverance to deal with setbacks effectively. It is crucial to maintain positive spirits while raising funds for your venture. Setbacks may occur but how you bounce back from it matters!
Persistence and follow up
A pitch may have gone extremely well. Now thou are extremely hopeful and you are patiently waiting for the callback. Ring a bell? But that phone bell never rings. What most founders need to understand is these fundraisers are extremely busy and network with a large number of people. One must make sure to follow up. After the pitch, a smart founder will make sure to ask when they should have a firm answer by, so he/she knows when to follow up.
The lone wolf attitude
Many entrepreneurs think they are like batman and can function best when they are alone. This is the real world and not the comical Gotham City. One must ensure that they have a stable and firm core team in place. A good core team can help the founder create a more articulated roadmap to the future of the venture. A core team from various professional backgrounds will ensure you are fully equipped to take on the challenges and hurdles that may show on the journey. A single person cannot execute everything by himself.
Delegation of tasks not only helps getting work done faster but also ensures it is completed with precision. In addition to a team, if there exist one or more co-founders then it widens the horizon of opportunities as they bring along with them, their experience and their networking. This gives you more opportunity and most definitely increases the rate of success.
Underestimating the value of social media
In the current times, social media is the most powerful tool a start-up has at their disposal. It widens the outreach by a light-year! Social media can be used to build a narrative for your business and establish a brand presence that may be viewed by potential investors. Marketing, sales, advertisements and for the purpose of fundraising as well, social media can do it all.
Exploring options for financing
In this generation, we are spoilt for choice. In everything! There are multiple options on every front and there exist multiple options for financing your start-up. Most individuals do not have the required knowledge about financing for their venture and think Venture capitals and banks are their only source to raise capital.
Most ventures want to have a practice of being debt-free from the start so most stay away from credit-based financing styles but there still exist multiple options like Angel investors, private equity investors, revenue-based financing models, equipment financing, merchant cash advances etc. that may help jumpstart your venture.
Wrong financing model
Timing is key. What type of financing model aligns with your business model and at which stage is of utmost importance? It boils down to research, research. and research. The mistake of choosing the wrong financing model at the wrong stage can affect the venture deeply. There exists a risk of hurting the valuation of your company, running into debt, legal notices from funders or even internal disputes in the venture. Therefore, a start-up must evaluate its modus operandi and select a financing model that suits it best.
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