Top 3 Mistakes Startups Make When Asking for Capital

By |2017-09-14T11:21:05-07:00July 29th, 2016|

So you want to find funding for your startup? Just pick up the phone and call your friendly, local venture capitalist (VC), right? Wrong. While capital markets in the United States have thawed significantly since the recession, the mood in Silicon Valley and elsewhere still remains uncertain, as failed startups exceed the successful by a ratio of 9 to 1. So how do you as an entrepreneur obtain venture capital funding? Here are 3 simple pitfalls to avoid when making your first ask:

#1 Don’t Ask Too Soon

The typical entrepreneur’s thought process often goes like this:

Hey, I have a great idea…

Woah, this idea is going to be expensive…

Oh, why don’t I just ask someone else for the money?

If this sounds like familiar, you might as well just glue a picture of yourself on a dartboard because that’s probably what you’re going to feel like once you walk out of an investor meeting. The best time to seek funding is not usually in the concept or research and development (R & D) phase, but after you have a completed proof of concept (POC) with an existing user base that validates market demand. Seeing an investor with an NDA and snazzy PowerPoint in your hand without a real product can be a quick way to either get the idea stolen from right under you, or just get laughed out of town. The amount of risk associated with a concept investment is typically far too high for anyone but an oddball angel. Successful entrepreneurs usually raise at least $100k-$200k on their own, from family, friends, and by taking on debt so that by the time they reach the investor’s table, there is a clear-cut business case for closing a deal.

#2 Don’t Ask for Too Much

One of the most popular words around Silicon Valley at the moment is “LSM” or “lean startup model.” In Valley-speak, this means giving you as little as possible until you’ve proven yourself, and if that means you’re eating ramen and sleeping out of a friend’s garage while the company is pre-revenue, so be it. Gone are the dot-com days of large, bulky seed investments. Forget the pitch decks with nice, round, comfy numbers like $10M, $50M, and $100M; usually they are now a big red flag that says “I didn’t think this through.” The decks that tend to get funded are skinny, lean, and detailed down to the last pencil and sticky note in the supply closet. They have smaller, more exact asks. Everything is line-itemed and the budget is 10 + pages long. As the founder you should never expect an initial salary until your company is well off the ground. As for an office? Unless you can demonstrate it is absolutely critical to your business, probably not. You are an uncertified entrepreneur and represent the highest potential class of investment risk. Act accordingly.

#3 Don’t “Ask” At All

Ask and you shall receive? Think again. The clumsiest move might be to hire an “investment consultant” or an investment mill. If your idea is solid there is absolutely no need for middlemen. The “investors” who wind up on “investor mailing lists” are definitely not the same people who take out their checkbook for a good idea. The best VCs tend not to wait around to get called, they do the calling. Most established VCs have an entire department devoted to sniffing out promising startups and bringing them to the table. So don’t go to the investors, make them come to you. Consider starting by generating independent buzz, do media campaigns, get on TV, get on the radio. Make as much noise as it takes to get some attention, and once you get an offer, consider leveraging it into a better one.

These are just three of the most mistakes that some entrepreneurs make when pursuing venture capital funding. Before you approach investors, you might want to consider asking yourself, “would I fund this idea, presented in this manner?” And if the answer is no, ask, “what would change my answer as an investor?” Common sense and empathy for your potential investor can help you avoid wasting both parties’ time.

Photo Credit: mattmylesphoto, Twenty20