5 Pitfalls for Founders to Avoid When Raising Money: I’ve spent basically my whole career since 2004 in and around other people’s money, starting in investment banking and eventually getting out of that to start and run my own companies, often raising money as part of that.
I was employee #1 at one company, founder and CEO of another, and an employee at two others over the last eight years. All software companies, all less than a few million in revenue, all less than 25 employees, all with outside capital contributing to their success.
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And that’s why I started Bigfoot Capital, to support companies like those. Because I know that venture capital isn’t always the right way; I’ve seen it firsthand. I think there are better ways to go about funding startups, so that’s where we’re going.
Who are the people behind all this money? They come in all shapes and sizes and come into your company at different points in time. But, at the end of the day, they’re people who have been entrusted by other people to make sound investment decisions.
That’s all they are.
They put money out into the world, and the people they got it from expect it to come back larger. So, while they’re all different in terms of how they do it, capital providers are really all the same. They all have a common fear, and it’s not death. It’s a more visceral type of fear than that.
What they really fear is underperforming.
Why would you be deathly afraid of underperforming as a capital provider? It’s basically because if you put money out and it doesn’t come back as expected you’re probably not going to get any more money. Which means you’re probably not going to be an investor anymore. You’re out of business.
The solution to this is comfort. Investors need comfort. It’s more important than anything over the long term. We want to be excited, and stay excited, about the investments we’re making, but we need to be comfortable that we’re making good decisions with other people’s money first and foremost.
How do make sure that investors are comfortable? It all starts on day one. Basically, how you go about the process of raising money is an indicator of how you’ll operate the rest of your business. And that is an indicator to investors as to whether or not they’ll get their money back. With that in mind, here are six pitfalls that Founders need to avoid when raising money.
Casually raising.
Raising money is not fun. No one likes it. I don’t like it. This leads to the notion of doing it but not really being invested in the process. And you’re not really doing it if that’s your mindset.
Symptoms of that are long delays. Maybe looking to close on some capital in the next few months, but your deadlines come and go and you still don’t have any money in your account. Are you really trying to raise money?
As a capital provider, I start to question your commitment. I’m going to turn my attention to people who I feel are more committed and are showing that commitment.
Because when you’re too casual you’re not putting me to work. I really can’t do my job without hopefully helping you try to do your job. Put me to work. I want to be helpful. Ask me about the process, ask me about other players, ask me for introductions, ask me to review your business model. Don’t let me underdeliver, otherwise I’ll lose the inclination to help.
Remember, I’m not the only one. Investor markets are often localized. They’re small and word gets around, deals get stale, and people move on.
Having poor timing when raising money.
This is pretty simple. You’re either too early or you’re too late.
I’ve raised money twice for pre-product launch companies. It sucks and I’m never going to do it again. Because it starts the clock ticking right away. You can’t explore, you can’t iterate, you can’t learn. It’s a very stressful position to be in.
You can be too early and should maybe test the waters a little bit, have some conversations, before going all-in. Because when you raise you’ll have to prove more to your investors faster than you might be able to.
But you can also be too late, waiting too long to raise. Maybe you’ve got a month of runway, you can’t grow out of it, and all of a sudden you appear to be in a distressed investment situation. I’m not saying you can’t get a deal done, but if you do get a deal done you’re probably not going to love it. That’s a really challenging position to be in and it comes from poor timing.
Raising money from the wrong audience.
When getting started raising money it’s easy to go out there and get a lot of names of people with money and firms with money, but it takes some work to really diligence that down and target appropriately. At the end of the day, this is sales. You’ve got to create a target and work a process to go after the right folks.
Having unrealistic expectations.
We all think we’re super valuable and that things are going to happen quickly for us. But then reality steps in and we get beat down and don’t accomplish what we think we will.
So being real with ourselves is super important. I know I just said target your list down, but don’t have a tiny list. Don’t go after just two people; have maybe 30 that you’re targeting for capital. In the average series A round, founders typically go after 30 to 50 different funds and closed one.
Overoptimizing the deal.
So, maybe we’ve signed a term sheet. We feel good about it. It’s mutually agreeable, and then the renegotiating starts. That’s challenging. We’re working on trust while we’re still building it. I’ve known you for maybe 20 days and pushing for too much optimization can make me start wondering. “Is this how it’s always going to be with this founder?” Push too hard and that good faith just goes out the window and it can be very hard to get back.
For Founders, capital acquisition is basically sales. If that’s not your thing, please get help. You still need to be intimately involved but get some support and have a process in place before you start reaching out.
It’s just like any other part of your business, whether it’s product, or marketing, or admin. The whole point of this process is reducing doubts and making investors comfortable.
The rest will fall into place.
