01/03/2020 0 Comment

Mistakes to avoid while raising venture funding for your startup.

Learn when it’s time to pitch your business for venture funding.

 

Building a startup is a no mean feat especially expansion and scaling which require going beyond the pool of resources one company has and on-boarding an investor. Venture capitalists are no dummies, they won’t just throw your money based on your sweet-talking and pitch, they need to see the concrete business projections and your previous track record as a business. In our last interaction on social media, we had many folks reach out to us with queries regarding fundraising practices and pitch deck templates for tech startups. And on the whole, we noticed a simple pattern among those cases which had trouble in the past to raise money. It all boils down to the two mistakes rooted in poor assumptions about raising venture funding which is::

  • Any business qualifies for venture funding if there is early traction.
  • The founder’s background doesn’t hold relevance if there is early traction.

Often times, these assumptions fail the founders right from the start. Try to keep your head clear of them and get a check beforehand.

Not Every Business qualifies for Venture Funding

A mismatch in risk-assessment is always there between founders and venture capitalists. A founder, especially a first-time entrepreneur, will be incredibly risk-hesitant and will make sure to do whatever it takes to keep their company alive. It is all they got—a personification of their personal success or failure; their reputation materialized into one trophy. Investors, on the other hand, are willing to make several risky bets due to the economics of running a fund. They want founders to spend the resources provided to either succeed or fail quickly. All they need is one start-up to be mega-successful, but they need every start-up they invest in to have the potential to be mega-successful.

Potential is usually conveyed through a vision and supported by a Total Addressable Market (TAM). Typically, TAM is some rough estimate you determine through market research. However, it is useful to help investors understand the potential upsides to your start-up. Founders with early traction tend to overestimate the importance of their toehold and underestimate the importance of their vision and TAM.

Many start-ups with more than $600k in recurring annual revenue fail to raise a seed round because they failed to convey how they could convert their initial $600k into billions. Not many start-ups have that kind of potential—founders fail to determine if their start-up is fundamentally a niche business that should be bootstrapped versus one that fits the profile of a venture-funded rocket ship. If their start-up is the former, they’re bound to fail at fundraising even before they start.

Founder Background Is Still Incredibly Important.

Founders put too much emphasis on their start-up and not enough on how their backgrounds lead themselves to it. The most successful pitches are ones where founders have some type of market insight or baseline product, and how they organically arrived at their business in terms of timing and experience.

Countless times, founders choose to work on a start-up idea without any experience in the field and wonder why investors don’t back them. Given the choice between two start-ups, One by a founder with relevant market experience, and one without it, I guarantee the founder with experience will always trump and will naturally have a better pitch. It’s also difficult for a founder to be passionate about a Domain they have no significant operating experience in. Granted, there are a few exceptions where a lack of experience results in a creative disruption of an industry. But this is very rare.

Yes, it’s tough for founders to evaluate whether or not they have founder-start-up fit, but it is necessary to do so. It takes a lot of courage and self-awareness to objectively look at the situation and say “no, the timing is not right for me yet.” I’d argue that most founders just want to be founders initially for personal reasons and are badly underprepared to carry out their vision—but this doesn’t mean they never will be.

Be Honest With Your Business. Don’t fool around!

So, You will be doing yourself and your business a great disservice if you pursue venture funding if your business isn’t suitable for it in the first place. You will know yourself when it is the right time for you to start your own business. So instead, think about closing your knowledge gaps and how to improve upon your leadership skill set. Work in fast-growing companies to maximize your learning on a daily basis. Get an understanding of business opportunities that exist in these fast-growing companies. Eventually, your knowledge will organically materialize into a business idea that makes sense and that you’ll be prepared for. Don’t try to force yourself to become a successful founder, let destiny take its course.

Also Check Out:: Why the innovator in you is supposed to helm your own operation.

If you like what you read, do check out our other entries and connect with us on Facebook and LinkedIn to stay updated with the latest tech news and business insights.

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