How to set up and run a small business

Billboard – Finance

You are here: Home » Finance » Raising Money » 7 Fundraising Mistakes that will stop investors from investing in your company

7 Fundraising Mistakes that will stop investors from investing in your company

October 10, 2018

fundraising failures - mistakes to avoid when raising finance for your business 

Getting funds together to accelerate your venture won’t be a quick task. Choosing the wrong fundraising activities can not only prolong the process, it can even deter investors from backing your business.

So, what are the most common mistakes entrepreneurs make when trying to bring in funding for their companies? Funding expert, John Auckland of TribeFirst, reveals 7 frequent fundraising failures;

1. Mixing with the wrong crowds

This is usually the biggest pitfall for founders.

Most entrepreneurs have typically made an impact in the past, perhaps with a fleet of successes and enough experience to inspire a huge amount of confidence in themselves. However, this can potentially lead to an unhealthy arrogance that might put off investors, who normally prefer to back a cohesive and multi-talented team.

They tend to look for a group of people with an impressive list of experience in their relevant industry and a desire and coherent vision to shake it up. You don’t need to be a veteran in your field – you can easily recruit board advisers with these credentials to bolster your case.

They only need to be around for a few board meetings a year, or perhaps a phone call here and there. But including these experts in your company isn’t just for show. They’ll know their stuff and will be able to help you spot a rare opportunity and warn you before you make huge, often expensive mistakes.

Most of the time you don’t even need to pay them much, just be careful you don’t give them too much equity.

2. Fluffing the numbers

How do you justify your valuation? Do you know your run rate? And how about your burn rate?

If you’re operating at a loss, when will you balance the books? What’s your three-year forecast for EBITDA?

Expect quickfire questions such as these from an investor and learn how to answer them without hesitation.

To familiarise yourself with the jargon, I recommend checking out equity crowdfunding platforms like Crowdcube and Seedrs to see what questions investors ask. While some of them might be very specific to the campaign, you do see the same questions pop up all the time. Also read; A Beginner’s guide to financial reports.

All of the key elements of your pitch should be available in a one-page document that you can prepare in advance for investors. Even if you’re not great with numbers, you’ll be able to learn by heart all of the information in your one-pager.

3. Having highly inaccurate forecasts

It’s a complete waste of time if you can remember your numbers but they’re way off the mark. No one expects new startups and fledgling companies to have an accurate growth forecast, but it’s important your forecasts are realistic.

Reflect key milestones in the early stage of your business, such as a sales boost when your product launches in a new market, or a spike in your user base as you diversify your range of services.

Your numbers should also grow in line with market trends and not be radically different from that of competitors. By justifying your calculations, you’ll be able to show you know your industry well.

If your growth predictions are uninspiring, there simply may not be the growth potential you once hoped for.

Most investors look for 3-5x return on investment (ROI) in return for risking their money. If you believe your business will boom in its early years, it’s still important to think twice about this. Even the social media giants couldn’t predict their own meteoric rises.

All investors dream of discovering those hyper rare ‘unicorn’ firms that achieve a $1bn+ valuation in just a few years of trading, but trust me, they like to feel like they’ve discovered those rare gems, not be served them on a plate.

Investors might end up running a mile if the only way of becoming profitable is from having a colossal customer base.

4. Valuation, valuation, valuation

Entrepreneurs always stress about pitching the wrong valuation. Valuing a business is more an art than a science, and yet the more scientific you make it sound the more reassurance it provides investors. So, the best place to start is by first crafting a realistic set of forecasts (see point 3).

There was a time where valuations were a mystery to me too. But since working with 50 startup or growth companies, and chatting to hundreds of investors, I’m confident I’ve found the three key elements to getting it right:

i) Setting the right band

Investors tend to like it when you offer the right amount of equity in a round – typically around 10-25% each time. If you’re offering more or less than this, it tends to raise questions that you had better have the answers to.

ii) Look at other companies in your sector

Check out other companies on Beauhurst, Crunchbase, or Inside TAB to see what valuation they had at a specific stage in their business. Perhaps there is a trend in your industry. Tech firms often base their value on the number of active users, for instance.

The easiest way to reflect the valuation question is to make sure yours is in the same ballpark as your competitors.

iii) Present a logical argument

If you have another business valuation to compare with, use this the argument for your valuation. A hair-care brand may, for example, cite Unilever’s purchase of TIGI for 1.65x of the firm’s then-annual revenue ($411 million based on a $250 million stable annual revenue). So a logical argument would be to say something like the following –

We project an £8.5 million turnover in year five. Unilever bought TIGI on a 1.65x turnover valuation. Using the same calculations, we would be valued at £14 million. Our current £1.4 million valuation would therefore provide around a 10x ROI.

There are many more legitimate arguments. Just make sure the numbers are easy to interpret, you have a worthy comparison and your case is realistic.

5. Muddying your message

For both the crowdfunding accelerators I run for Virgin StartUp and the bootcamps I manage with Grant Thornton, I spend the vast majority of my time helping business leaders to distil their message. I always advise entrepreneurs to use fewer, more effective words to describe their idea with the utmost clarity.

Some businesses try to engage investors with an ad or product video. Beyond demonstrating your product, though, you need to paint your company’s vision, outline market potential, and give them an idea of what the ROI might be from backing your company.

When it comes to attracting investors, clarity trumps creativity, each and every time.

6. Rapid spending while raising funds

Investors have been known to pull their investment when the company instantly goes on a spending spree. I’ve seen it happen several times during crowdfunding campaigns.

It makes sense that investors will expect you to be strategic with your cash, and not blow your money in a pinch.

With a new cash injection, it’s understandable for companies to produce a fancy video, offer extravagant awards or even host a flashy event. However, you don’t need to shell out to produce a professional video or offer an enticing award that costs your company a lot to produce. It’s also possible to hold modest events and webinars that cost literally nothing.

One company in the events industry was pretty unlucky recently. They used all their personal contacts to launch a seemingly extravagant event that actually cost them very little. One investor was unimpressed and revoked their £30k investment.

7. Fundraising at the last minute

When your bank balance is running low, you’ll emanate desperation, and usually, it’ll be the investor that benefits from a deal that’s unfair to you. When you need credit, one tactic is to apply for it when you don’t need it in order to get a good deal in the future.

It can also take a fair while for all your new investment to reach your bank account, so it’s an all-round better decision to raise funds long before you’ll truly need them.

Bonus Tip: Keep in touch with your investors

When you’ve completed one successful raise, it’s worth thinking about your next one shortly after. If you only contact your investors when you need more money, they’re unlikely to invest again.

If you instead keep them in the fold and remind them that they are valued, they’ll be more likely to back you in your next round.

Investors tend to like the risk and reward of investing in young companies, and often like to tell their mates down the pub about the start-ups they’re involved in. So going off the radar will remove a huge investment incentive for them. For investors, communication is crucial.

While success is never guaranteed in fundraising, I hope these tips will help you on your journey, and I wish you the best of luck.

About the author

This guide has been written exclusively for ByteStart by John Auckland, a crowdfunding specialist and founder of TribeFirst, a global crowdfunding communications agency that has helped raise in excess of £5m for over 30 companies. John – who is also Virgin StartUp’s crowdfunding trainer and consultant, helping them to run branded workshops, webinars and programmes on crowdfunding – is a regular contributor to ByteStart, and you can benefit from more of his expertise and insight into crowdfunding in;

More on funding a business

ByteStart is packed with help and tips on all aspects of starting and funding your business. Check out some of our most popular guides;

Funding your business

Cashflow

Starting Up

Image: DepositPhotos.com