‘Chance favors only the prepared mind.’ – Louis Pasteur.
One of the objectives of the companies going through Techstars and other accelerators is to secure financing. Most companies are coming in focusing on accelerating their businesses and then securing capital to continue to accelerate growth. As the common shareholder in the company, Techstars is completely aligned with these objectives.
The reality is that most startups need to raise funding to grow, and to become real companies. It’s not typical that we can all make money if you don’t fundraise, and certainly very unlikely that anyone will make any money if your company does not grow.
So we love it when companies get funding.
But we’ve seen a clear pattern with the companies that rush into funding too early — they actually have more difficulty closing the financing. Why? Here are the 9 gotchas of seed funding that will help you understand what goes wrong.
- Lack of Preparation
To be ready to fundraise, you need to have a strong knowledge of the problem you are solving, why did you start this business, your business ecosystem – customers, market opportunity, competition, go to market strategy, distribution channels, pricing, burn rate, and many other things. You are going to be asked a whole lot of questions and then some, by potential investors. If you are not prepared, it will come through and will be a big turn off.
- Lack of Traction
Very few companies get seed funding without having some kind of traction. Unless you are a team of successful serial entrepreneurs, and even then, investors expect customer/user traction. This does not mean perfect product/market fit. It means early evidence that there is a problem and your solution/product is going to have a shot at addressing it.
- Being Pulled into Fundraising
So, you weren’t thinking about raising money, but you met a bunch of investors and they said that you really should. Other founders around you said you should do it, too. You then decide what the heck, I will give it a shot. It is a mistake. You are not ready, you didn’t prepare, you didn’t plan it.
Don’t fundraise on other people’s turf and time. Control your destiny by preparing, checking the boxes, and then going out and raising. No one is going away, and investors will not say no to a meeting with you later, if you said no to them when you were not ready.
- Chasing the Wrong People
This is a big one, and it is bad. All investors are different. They like different verticals. They write checks of different sizes. Just because someone is an investor does not mean he or she is the right investor for you. Doing research, understanding what particular investors likes, and why you might be a fit is important. It is equally important to get an introduction from someone who knows you and knows the investor.
- Not pitching Angels & VCs correctly
Angel investors, micro VCs, VCs are all very different, in terms of their objectives and styles, and consequently, how they need to be approached and pitched. An angel investor who writes $25K-$50K may want a couple of meetings; a micro VC who writes $100K-$250K checks will be engaged for a month, and may or may not lead. VCs take the longest, write the biggest checks, and like to lead rounds and take board seats. If you don’t understand how to engage each category of investors correctly, you will waste time and may not get the desired result.
- Not having an overall strategy
Even if you know whom you are going after and why, you still need a strategy.
A strategy would entail planning the entire fundraising process, and knowing who to meet with first, and who to meet with later. Do you start by raising a few hundred thousand from angels first, or do you go straight to VCs? Making the right decisions about your financing strategy, especially if you are a first time founder, is really important. Not having a plan increases the chance of not raising the capital you need to grow the business.
- The ‘I am special’ problem
But of course you are! Me, too! Aren’t we all? 🙂 When you go to casino and gamble, you think — all these poor suckers around me, they are going to lose, but me? No, no, no. I am a winner. And this is sad,, because as an entrepreneur, you actually are special. All of us are. We are this crazy, courageous, relentless unstoppable breed. But the reality is that it is not a good bet to make, when it comes to seed funding. You are better off being prepared and winning because of that.
- Not realizing you are running a race
When you are fundraising, the word travels around. Investors are people, and they talk. Not because they are bad, or against you. It is natural to compare notes in any industry, and VCs are no exception. When you are going out to raise, you need to do it quickly, and get all the conversations aligned. Once you start raising, you have to run the race until you are done or you decide to stop because it just isn’t coming together. Realize that this is the race before you enter it.
- Running out of bullets
It maybe a funny analogy, but it makes sense. In the beginning of the process you have a loaded gun, and you start firing shots and start having all of these great conversations. Then at some point, especially in a smaller ecosystems, you find that you’ve talked to pretty much everyone. There is no one left. You just fired all your shots, and your gun is now empty.
The bad news is, if you have already met with all of the investors, and they didn’t write you a check, then you can’t go back to them next month and try again. The good news is that you actually can go back to them in six months, show progress, and if you are crushing it this time around you will get the check. It takes a while to reload the gun, and the only bullets allowed on reload are the real traction bullets.
How and When to Fundraise
So how do you actually win this and get funding?
Two things – preparation and traction. Get all your things in order. Your deck, your pitch, your funding strategy, who you are going to talk to and why, get the intros, etc. Be prepared.
But even if you are prepared, it may not be enough in this day and age. We see less and less people funding ideas and decks. Investors want to see early traction. Some sort of indication that not only your idea is great, but that you talked to customers, built the MVP and have some kind of traction — proof that you can do it and that it may work.
And if you find it too daunting and complicated — get help! Talk to fellow entrepreneurs who’ve done it before. Apply to Techstars and we can help you accelerate the business and raise funding.
Really think through the funding. Prepare. Be thoughtful.
Win.
Image credit: Paul VanDerWerf
