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Many entrepreneurs need large amounts of cash to launch and grow their startup business. If you’re passionate about the potential of your idea, pitching it to outside investors may seem like an easy and obvious way to get some much-needed cash.
But first-time entrepreneurs often make mistakes when engaging with private investors, from not demanding the right amount to giving up control of their business. Members share some common mistakes entrepreneurs make when trying to raise capital through private investors. Regardless of where you are in fundraising, this expert advice can help you avoid common pitfalls and increase your chances of getting the funding you need to grow.
Members from the left in the photo.
Photos courtesy of each member.
1. Don’t directly touch the important details of the pitch
Entrepreneurs underestimate the amount of time it takes for their decks and stories to make an impression. 90 to 300 seconds should suffice.Stop focusing on what excites you and use a short amount of time to highlight areas that excite retail investors. Is there a team with a
2. Do not use funding schedules
Entrepreneurs often underestimate the time from revenue to profitability and must ensure adequate cash flow to repay investors within agreed timeframes. Entrepreneurs need a solid business plan with a clear spending schedule for raising capital. Using a funding schedule is the key to getting your business closer to profitability and not wasting capital. – Karla Dennis, Karla Dennis and Associates Inc.
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3. Give away too much “pure” stock
It is a mistake to give too much “pure” stock (“preferred stock”) in exchange for a smaller amount of stock with some repayment terms. Preferred stock investors typically accept less ownership than true equity investors because they provide a stream of repayments for the life of the investment or until the acquisition. Stocks always cost more than liabilities, so keep as many assets as possible. – Christopher Hahn, Fountainhead
4. Don’t research individual investors first
The biggest mistake entrepreneurs make when trying to raise capital is not doing their homework on the individual investors they’re raising money from. It is very important to align your business with new investors as well as investors who will help you achieve the best goals for your company and existing stakeholders, especially if you have impact goals. – Jaclyn Foroughi, Brazen Impact
5. Miscalculation of the fundraising schedule
Entrepreneurs are often too optimistic and insufficiently rigorous when estimating funding timelines. Earnings projections can be higher, but projected funding timelines are generally too short. Investors may delay investing due to careful consideration, seeking more due diligence, or encountering problems with other investments. An entrepreneur estimates a funding timeline, which he needs to double. – Andrew Glaze, Wealth Stack
6. They don’t understand the time value of money
One of the most common mistakes entrepreneurs make when trying to raise money for their business from private investors is to misjudge the time value of money and the total cost of capital. You need a thorough understanding of how long it will take to raise capital, the total cost of capital, and whether the time value of money aligns with projected milestones. A miscalculation can defeat the original purpose. – Kacey Butcher, Adaptation Financial
7. Prioritize money over investor experience
It’s easy to get excited about private investor fundraising. Many entrepreneurs prioritize money over investor experience. You must explain your company’s mission, solutions and growth to convince investors that you can deliver something of value and that their dedication will be rewarded financially and emotionally. – Neil Anders, Trusted Rate, Inc.
8. Ignorance of investor expectations
Many entrepreneurs mistakenly take on private capital without doing the necessary homework. Find out what your investors’ expectations are when it comes to growth and who’s in control. Invite a team of advisors to make sure your company’s financial goals are aligned with your private equity before you sign on the dotted line. Don’t get lost in what’s important to your company’s mission and long-term goals. – Laetitia Berbaum, Sandbergen Group
9. Relinquishing control too soon
Many first-time entrepreneurs relinquish control to early investors and advisors. This makes it difficult to seek additional funding rounds. Additionally, it’s important for entrepreneurs to look for the right type of investor, especially in early rounds. They need investors who can add value and provide strategic advice to grow their company. – Ben Jen, Ben Jen Holdings SLLC
10. Rely solely on the business plan
Rather than simply relying on a business plan to attract investors, entrepreneurs take a more holistic approach by providing potential investors with additional evidence that their venture will be profitable and successful. Showing potential investors metrics, such as increasing revenue over time and a rapidly expanding customer base, for example, helps establish a venture’s credibility. – Angelo Ciaramello, Funding Trader
11. Lose control of your business to investors
Entrepreneurs sometimes value what they get rather than what they give up. Sometimes external capital is the only way to grow. But losing control of a business to an investor can have devastating effects on an entrepreneur’s life. Know what you’re giving up and make sure it’s worth it. If there are other ways to reach your goal, consider them carefully. Thinking carefully today can prevent heartache tomorrow. – Todd Sixt, Strait & Sound Wealth Management LLC
12. Market yourself
One of the biggest mistakes entrepreneurs can make is selling themselves short. Not all capital is good capital. The allure of cash injections may be tempting, but don’t short sell yourself or your business. Don’t be afraid to say “no” if the terms don’t seem reasonable, or if the demands from investors are too high. It may save you from future problems. – Sean Frank, Crowd Equity Group
13. Consider external investment as a “must”
The first mistake is to think that you need 100% external investment to get your business up and running. There are so many alternatives to funding a startup, including self-funding. This method of entrepreneurship, known as bootstrapping, means that business owners do not have to answer to stakeholders and can make important decisions without outside input. – Austin Mac Nab, VizyPay
14. Don’t ask for the right amount
One of the mistakes entrepreneurs make when trying to raise money for their business is not asking for the right amount. Entrepreneurs often don’t ask for enough money and can’t run their business. On the one hand, many entrepreneurs demand large sums of money and leave their bank accounts unused, causing investor pressure. – Jared Weitz, United Capital Source Inc.
15. Don’t consider other funding options first
The more you rely on individual investors, the more you give up control of your business. Consider all financing options before seeking capital from individual investors. Lender financing requires repayment, but there may be value in remaining in complete control of the company’s direction. Growth may be slower, but the rewards are all yours. – Justin Goodbred, Wealthsource Partners, LLC
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