Top mistakes startups need to avoid when seeking investment

Unless you have access to a pile of money, starting a business is an uphill climb. Though, if you’re not leaning on savings, the other popular option is bootstrapping.

Bootstrapping is great if you’re low on startup capital and your business model allows you to generate sales when you launch. If bootstrapping isn’t a great fit your business you will need startup funding to get going. Whilst each funding option has its pros and cons, there are a few mistakes you can prepare for and potentially avoid when getting ready to seek funding– here are five to consider.

Knowing how much money you need

Whilst some entrepreneurs think it’s a good idea to ask for less than they need, it’s always better to be as accurate as possible. Underestimating could reduce the level of confidence an investor has in your business, resulting in a lack of interest and then eventually walking away. 

Even if your underestimation goes well and you secure the funding, you may run out of money and into trouble. That’s why it’s important to take the time and work out how much you need before pitching your startup to investors.

Of course, it will take time to run projections but it’s time well spent, so you can end up with a confident figure, showing that you know your business well and can steer the ship.

Being over-generous with equity

Most investors want an appealing share of equity in exchange for their money, but giving away too much at the beginning could be unfortunate. 

Ideally, you would raise the money you need in the first round and become profitable, eliminating the need to go back for the second round of funding. But, as a startup, some unforeseen challenges and hurdles, which means you can’t always count on the best outcome, but instead plan for the journey as best you can.

That’s why it’s important to take your time when seeking funding, so you are prepared for as many eventualities as possible. If you do get to a point where you need to raise more money you need to maintain ownership shares within the business. No entrepreneur starts out wanting to go through the demanding journey of building a business to later being a minority owner in his or her own company.

Equity is important, so be methodical when deciding how much to give an investor.

Poor management of personal debt

It’s not unusual to find startup founders who depend heavily on their credit cards to fund their business in the early stages, which is an expensive choice for anyone. Although accessible, using a credit card is one of the most expensive options, especially with high-interest rates and the possibility of low credit scores. 

Putting yourself into debt to build your business might sound great at the time, but if something should go wrong you will be left in a very uncomfortable position.

Every entrepreneur is confident about their business venture and that’s important, but don’t allow it to cloud your judgement, especially if there is a strong chance it could wreck your finances.

Lack of detailed cash-flow

When securing funding from an investor or traditionally with a bank/building society, you will need to have a detailed cash-flow forecast. This forecast should spread across a minimum of 24months to show that you are in control and know how much money will be going in and out of your business. 

This goes as far as calculating each penny that flows through the business. Not having an in-depth understanding of your cash-flow can lead to untold issues, including not having cash for the typical day-to-day tasks, which could cause serious problems within your business.

Having a detailed cash-flow analysis that you understand and can break down to investors shows that you have a firm grip on the operational side of your business. Although a great benefit to investors, it will come in handy for you to see where your business could go and whether it truly has legs to become a successful business venture.

These mistakes may not seem complicated, but they are reoccurring errors that some startups make when seeking investment. Hence the importance of taking your time when preparing to raise funding. It may seem tedious, but once done right the results could be exceptional for your business.

This article was previously published in our January 2020 Print Magazine Issue