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WittySparks / Business / Common Mistakes Entrepreneurs Make When Approaching Investors
Businessman entrepreneur mistakes to avoid

Common Mistakes Entrepreneurs Make When Approaching Investors

Business October 21, 2021 by Nishitha

Want to reduce screen time? Let me read it for you :)

Gaining access to ample funding is very crucial for entrepreneurs to scale up their businesses. After they have utilized all their bootstrapped resources from friends and family, they are on a constant stride for an external investor to put money in their ventures.

One challenge they have to face consistently is persuading investors through their supposed innovative thought, robust team, and a marketable business plan. All of this is, of course, done in addition to actually building the business from ground zero. To realize their monetary goals – traditionally, it is thought that they would be making a great pitch to their potential investors.

Let us see what stats say in this regard. Every year, more than 6 million new entrepreneurs enter the US market. Out of these, a bare 5000 get venture funding, and 70,000 somehow gain angel investing.

The rest of 5.9 million entrepreneurs have difficulty meeting their ends because they make some blunders that prevent them from accessing funds in the future. If you are a budding entrepreneur who does not like to be counted in the rest of 98% who would never get any external funding, you should evade those common fundraising mistakes.

There is no shortage of resources that teach how entrepreneurs should craft a powerful fundraising pitch from venture capital companies. However, most of these resources miss one critical component – that is, what should be the initial meeting’s particulars.

I am presenting a list of such common mistakes that have been called multiple times and might seem too obvious. Yet, they keep on repeated by entrepreneurs across the globe. Thank goodness, it is not quite challenging to fix those.

Here, I present the most common mistakes an entrepreneur should avoid or correct before he approaches an investor.

On this page

  • Presuming Whimsical Valuations
  • Shoddy Research On The Investor
  • Not Having Sufficient Understanding Of The Market Ahead
  • No Knowledge Of Term-Sheets
  • Having A Single-Minded Focus Only On Money
  • Putting All Your Stakes On COVID-19
  • Winding Up

Presuming Whimsical Valuations

The presumption of valuation of your startup without giving a serious thought about it could prove to be one of the biggest fundraising mistakes. It is a big challenge, as investors do not believe your figures unless you can demonstrate beyond doubt your growth numbers and traction with proper evidence.

Keep in mind that you are not entitled to claim your startup to be valued at a certain amount only because you assume that it will grow at that level. Your startup’s valuation results from the interplays between the various factors, such as revenue, traction, trend, market share, acquisition forecast, burn rate, etc.

The valuation is generally derived from its current position with an extrapolation of growth. In most cases, existing revenue and rapid revenue growth are considered. Hence, you must keep in mind that whatever valuation you put before your potential investors—you must be able to justify it.

The golden rule here is – do not become too much greedy. Another scenario may emerge where more funding might kill your company faster than underfunding. Sometimes investors offer more funding amount in anticipation of a more significant stake.

However, it might seem attractive but could impede in the future. So, have a better understanding of what you wish to raise.

Shoddy Research On The Investor

Pitching your startup without first of all determining if the investor is interested in your geography, market, industry, stage, or space would prove to be a fruitless exercise. Some of the investors might be interested only in mobile/internet-based businesses.

Some might be constrained only by biotech or health care technology, and others might be limited about the geography or region. There could also be some who might have reservations about the specific stage of investments.

Hence, always do your research on the investor profile to ensure that your startup lies in the narrow domain in which a particular investor operates or is interested.

You can start by browsing through your potential investors’ websites. There, you can gather sufficient data to determine the exact sector, geography, and other factors in which he likes to operate.

Other online resources might include portals, such as CB Insights. If a third party or an intermediary has introduced you to an investor—then undergo thorough research about the investor and try to find everything you can about the individuals and the company from the referring intermediary.

By being proactively diligent in your potential investor’s background, your conversation would be much more fruitful, and you shall have a greater chance of finding success.

Not Having Sufficient Understanding Of The Market Ahead

Make sure that you give sufficient attention to a thorough analysis of the competition ahead. If you say to a venture capitalist that there is no competition in front of you, you shall be perceived as immature and unsophisticated.

There is no condition in which you cannot have a competition. It might come in various forms, whether indirect or direct, or the form of an alternate solution. After assessing the market thoroughly, you should demonstrate to your potential investor your awareness of the market.

A venture capitalist is always eager to understand your insights into the question – why your proposed technology or product could prove to be a better solution than what already exists. It would be best if you presume that VCs have a better understanding of the competitive tech.

Hence, your answer should be perfect. Say, for example, your answer could be, “We are better than Twitter because we have editing functionality and our ease of use is greater.”

No Knowledge Of Term-Sheets

Term-sheets could be called as accurate detailing needed for availing external capitalization options. A problem generally seen with young entrepreneurs is their heavy reliance on lawyers without even knowing the ABC of how a transaction of this scale is made.

Understandably, an entrepreneur cannot be the jack of all trades, yet he must know the term sheet’s fundamentals. Most of the time, it is comprised of two parts. One part is regarding the ownership while the other talks of the economics. Term-sheets lay down the conditions and the extent to which a capital provider can have decision-making participation.

It also lists down the amount you and the investor shall receive once the company gets liquidated. To build a basic understanding of the term-sheet, you should not hesitate to talk to consultants, read resources, and research case studies before you foray into the world of fundraising.

Having A Single-Minded Focus Only On Money

What most young and budding entrepreneurs mistakenly believe is—fundraising is only about money. I must say that it is one of the biggest fallacies in the venture capital world. Startup investments and business are more about the partnerships and less about the money.

Fundraising is an opportunity for an entrepreneur to learn from the experience and the VC company’s resources. It is the time when you get trusted by the investors and they guide you. They fulfill your resource requirement in terms of both money and experience.

So, while searching for a fundraising opportunity, look beyond money. Try to settle for those venture capital companies that can provide you with a great network of partners, further boosting your business.

Putting All Your Stakes On COVID-19

If your business idea is such that it is based on extracting benefits from the COVID-19 pandemic conditions, then I must suggest you have to be extremely considerate about it. The global pandemic has taken a toll on more than 150,000 people across the globe.

If you have wholly reworked your business model due to this pandemic, then go ahead with your pitch with excessive prudence because VCs like to take a look in terms of decadal growth and not event-driven short-term spikes.

Winding Up

“Be ready to face failures in your thousand pitches before you arrive at a successful pitch. All it takes is one yes, to take off your idea from ground zero to horizon. So do not lose hope, keep on trying, keep on improving, and one day you will succeed.”

– Dale W Wood, CEO, and founder, Dale Ventures

I believe nothing could be more apt to represent the troubles faced while making a perfect pitch. It really makes sense to keep on trying uncomplainingly and working unceasingly on improving till you find the perfect venture capital company.

I wish good luck to my readers. I sincerely believe that, by avoiding these common mistakes, entrepreneurs can enhance their chances of finding the ideal venture capital prospect. All they need to do is to keep on trying patiently.

Image source: Freepik Premium

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About Nishitha

Co-founder of WittySparks
WittySparks Staff

I am done with my Physiotherapy Graduation. And I always try to share Health and technology tips with people. Apart from Physiotherapy and being a tech savvy, I do explore more on Technology side and I keep sharing my findings with wider audience.

View all posts by Nishitha

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