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7 Biggest Mistakes in Raising Startup Capital

Robin Robin Cross Cross

March 04, 2009

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Many financing efforts fail because of  some of these simple, and avoidable mistakes that business owners make when pitching their ideas to potential lenders or investors,

In my experience these mistakes fall into one of these categories.  Poor preparation, structuring the agreement, and managing the money once the deal is done.

You can increase your chances of having a successful business by steering clear of these missteps, when both raising capital and keeping the money flowing. Be sure to avoid these major blunders:

1. Half-baked business plans: There's nothing worse than going into a money meeting unprepared. If you haven't put the time and energy into writing a full-blown business plan complete with elements, such as a detailed business description, financial projections and a realistic view of the competitive market, the people with the cash, like angel investor networks or venture capitalists, won't put the time into evaluating your proposal.  No plan, no play it’s just that simple

The SBA is a good source for learning how to write a business plan as well as sample formats.

2. Focusing too much on the idea and too little on the management: It's not enough to convince potential backers that you've invented the next must have gadget or sure fire clothing concept. You also need a team that can generate the revenues to repay a bank loan or provide an exit strategy for a VC or angel investor. Many business novices ignore the second part of the equation; that can doom their money quest.

The greatest racehorse in the world still needs a great jockey to a win a race. The same principle applies in business. Showing that you have recruited an excellent salesperson, a skilled marketer, a qualified accountant with startup experience, key personnel, and outside experts like an attorney or a business coach who can supply professional guidance, can be essential to finding a capital funding source.

One secret I like to share is the value of an advisory board.  Bottom line… Get one.

3. Not asking for enough money; In a 2004 U.S. Bank study of reasons for small business failures, 79 percent cited "starting out with too little money" as one of the causes of their collapse. That's often because entrepreneurs who are wet behind the ears don't realize that they should calculate their borrowing needs based on their worst case scenario instead of their best case forecast.

An old accounting axiom says that everything will take twice as long and cost twice as much as you expect. While that may be an exaggeration, new business owners are frequently too optimistic about how soon they will begin to fill their cash pipeline and how fast the money will flow. If you're under funded, you won't have a cushion to tide you over in the event of slow initial sales or unexpected market conditions.   Smart Private Capital Investors expect your business plan to look grim in places.  Being overly optimistic as opposed to realistic can be your downfall.

The solution? Ask for more. Plan on needing more.  And be prepared to explain the realistic numbers to investors.

4. Having too many lenders or investors; One of the hazards of raising capital from multiple sources is trying to manage too many relationships and expectations. This takes time away from your core business. These (not so silent) partners may have conflicting interests or demands and the consequences can be loss managements’ focus. 

This is particularly true when you raise capital from friends and family. I have been in a series of meetings sometimes spending almost a week a month tending to the different requests from different investors when things were heating up.  I couldn’t effectively run the business this way. Lucky for me I had good people in place to let me talk to investors, but it was very time consuming, and could have cost me the whole business.

5. Failing to get the proper legal agreements; This is much more important than a prenuptial agreement, even for a couple with significant individual assets. Every lender or private capital investor eventually will need his money back, and a legal document covering everything from the terms to the timing can avoid the havoc of trying to renegotiate and manage falling expectations from investors.

People go to jail for incorrect paperwork.  Make this one of your highest priorities, period.

6. No cash flow management; Too many new business owners burn through their seed money too quickly and fail to reach positive cash flow in a timely manner. Some causal factors, such as late product deliveries and economic downturns may be beyond one's control, but the executive team is clearly at fault for others, such as unnecessary spending and overly optimistic expense/income forecasts. Financial investors don't take kindly to that sort of mismanagement. And if they turn off the tap, all of your hard work may go down the drain.  Keep your spending to a minimum… new desks and fancy offices are nice, but wait until the company is clearly self sufficient to invest in those things.  Payroll is more important.

Unless you make your money by having pretty “Image Offices,” or “Marquee Offices,” then frugal and practical rule the day here. You can get all the pretty furniture and toys AFTER you make a profit.

7. Choosing poor partners;   Really, you are your own best partner.  That is a difficult concept for many people to come to terms with.  So many times a young entrepreneur gives up control, either legally or by not making their own decisions, and the company tanks.  Just because someone says they have the experience that you need, or that they want to be your partner, (can I please…please be your partner, this looks like such a great idea and I would be Great for your business) doesn’t mean they WILL be a  good match for you.  Sometimes you can hire that expertise… and for much less than the partner will want.  Hold your ground.

There are some other pitfalls to avoid, like: Play by the lenders' rules to get them to open their checkbooks, but protect your self at the same time. There's no point in launching a business that will eventually sink under the weight of your investors' demands. Be tenacious. Be passionate about your idea.  If your business plan is good enough and you approach people consistently, you should be able to whistle all the way to the bank. 

Raising startup capital, even in today’s current economic time, is not impossible.  For more great ideas on ways to raise capital, I have been using Raising Capital Secrets.com, as one of my main resources.  No matter what, keep at it.  

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