"Sure, rejection is a part of life, and it’s true that being told ""no"" can be galvanizing. In fact, data suggests that one of the most critical factors leading to business success is grit.
But wouldn't life be simpler if you got what you wanted right out of the gate? Wouldn’t starting a company be simpler if your request for funding was accepted on the first try?
The reality is that funding your company is a process, and there are right and wrong ways of fundraising and some sure-fire approaches that will lead to being booed off the stage. Here are a few classic mistakes, along with the steps that can be taken to avoid them.
- Deer in headlights. As the old saying goes, a failure to prepare is preparation to fail. So be prepared. This means that you understand how your business works and your metrics. Not clearly understanding how your forecast or operating plan can be executed under changing market conditions doesn’t instill much confidence in your funder. My friend Corry Flatt, CEO of Bonfire, did a great talk recently about his time in the trenches and how he navigated the fundraising process. He even cited creating a cheat sheet that lists every metric in your business so that you can present confidently and so you can make it clear that you know what's going on in every corner. Have a data room prepared so that you can send a follow-up after every serious meeting, one that includes a link to a download of your company presentation, capitalization table, financing ask, operating plan, and all your storytelling materials.
- Spray and pray. Seek the right funding, as opposed to any funding. You should understand the stage your business is at and seek the funding that is most appropriate for that stage, whether debt or equity. If you're pre- or early revenue, seek out angels or friends and family, likely for equity investments. If you're in hardware, consider deprioritizing SaaS investors who care largely about monthly recurring revenue. If you're between rounds with clear line of sight to a big next series round and trying to stave dilution, look to venture debt-type solutions. Trying to convince investors who don't understand your business not only kills your chances, but also your time.
- Burnout. Your plan shouldn’t always be to keep raising capital to cover your cash burn. I get that high growth tech companies often are re-investing everything in growth (and who would want to pay taxes on profit instead of growing faster?). But at some point you'll want to show how the business can be self-sustaining and that you have a plan to master cashflow. Have a great plan, one that's realistic in different scenarios and one that allows you to get to profitability so an investor can see that the company's success doesn't hinge on someone else putting money in. If you're looking for non-dilutive options, this should be true especially nearer term.
- Bailout. Try not to come to a bank or investor when you're broke. Raising money takes time. If you're a good operator you'll see the cliff coming in your plan and you will be working on raising well in advance. No lender or investor likes being pressured into investing as a lifeline.
- Harry Houdini. Don’t hide. Don’t deflect. Institutional investors and banks have a regulatory obligation to know their client in order to remove the risk of money laundering. Be forthcoming with information regarding related parties or companies that you're invested in, as well as any criminal activity or proceedings against you. A failure to disclose kills more deals than we'd like to admit.
- The Big Spender. Have good credit personally. In some instances, personal guarantees will be required to secure the financing your company needs. A bank often uses a credit score, but the underlying theme is, if you can't manage your own personal finances, how can you manage someone else's on behalf of your company? Many people have had hard times and have made mistakes, but you better be working on correcting them or have a really great story once you’re past the front door.
- Wing and a Prayer. Have traction. Unless your business is brand spanking new, you should have some form of customer validation. These days, even in seed investing, most investors are looking for you to demonstrate that a category of buyers are willing to commit to your product. You might be able to bluff your way to a term sheet, but in due diligence, funders are going to call your customers, partners, other investors, read contracts, etc. There should be real demand for what you're selling.
- Frankenstein. Be attractive – as a business. Have a strong game plan, a big market, a coachable leadership team, competitive differentiation, and show that you’ve thought through all of the execution risks and mitigations. There are even free tools and templates to help you look good up front.
- The Urban Legend. Don’t be “that guy.” Show up on time. Dress appropriately. Be polite and respectful, not arrogant. Demonstrate passion, commitment, coachability. And, it should go without saying, do your research.
None of this means you'll get the money for certain, but it certainly eliminates some of the easy, yet common, barriers to getting a turn at the dance.
Banknotes is an occasional column offering financial advice to startups.
Photo by rawpixel on Unsplash."