10 Mistakes Entrepreneurs Make When Raising Capital

Raising capital is crucial for new ventures, but it's a path laden with potential pitfalls that can derail even the most promising startups. And given the global downturn in startup funding over the past couple of years, companies have little room for error.

Here are ten common mistakes to avoid during this critical process.

1. Failing to Leverage Networks ??

Many entrepreneurs fail to fully utilize their existing networks. Your connections are an invaluable asset, providing not just potential funding sources but also advice and introductions. Don’t be shy to ask for introductions! The worst you can get is a no, but often, you'll gain valuable connections and feedback.

2. Lacking a Clear Narrative ??

Entrepreneurs must be able to clearly and compellingly articulate what their company does, how it solves a problem, and why it's poised to make a big impact. A lack of clear narrative can make it difficult to attract the interest and attention of potential investors.

3. Underestimating the Amount of Capital Required ??

It’s common for entrepreneurs to underestimate how much money they will actually need. This includes funds necessary not only for starting up but also for sustaining operations until through the company's next stage of growth.

4. Neglecting Legal Advice ??

In the rush to cut costs, startups often underinvest in legal advice. Skimping on legal advice is a guaranteed way to run into problems down the road. Even if you use document templates, but sure to run them past your legal counsel. Disputes over investments could be costly or make attracting future investments impossible, so have a lawyer manage this process.

5. Over-Reliance on Legal Counsel ??

Conversely, it's also foolish to depend on your legal counsel for everything. It's your business, so you need to understand the terms of the deal that you're offering. Make sure you have the pre- and post-money valuations down cold. Same thing with the cap table. Telling a potential investor "I don't know; let me check with my lawyer" when asked simple questions about deal terms isn't a good way to instill confidence.

6. Poor Follow-Up ??

Consistent follow-up after initial meetings with potential investors is crucial. Keeping potential investors engaged and informed about your progress can turn tentative interest into solid commitments. It shows your dedication to the project and keeps the momentum going.

7. Complicated Deal Structures ??

Simplicity in deal structures is often more appealing to investors. Overly complex terms can be intimidating and may lead to misunderstandings or disputes. Strive for clear and straightforward terms that all parties can easily understand and agree upon, which helps facilitate smoother negotiations.

8. Ignoring Investor Fit ??

Just as important as securing capital is finding the right investors who align with the company’s vision and strategy. Partnering with investors who do not share the same business values or strategic vision can lead to conflicts later.

9. Overvaluing the Business ??

Setting an unrealistic valuation can deter investors. Overvaluation can lead to tough negotiations or, worse, a failure to secure funding. It's crucial to have a realistic, market-based valuation that can be justified to potential investors.

10. Relying Solely on External Funding ??

Excessive reliance on external funding without exploring bootstrapping or internal funding options can be risky. It’s vital to consider all sources of funding and not depend solely on external investors.

Conclusion

Being aware of and preparing for these pitfalls can greatly enhance your ability to successfully raise capital while maintaining control over your business and aligning with the right partners. If you know a company going through this process, Jackson Advisory Group helps clients develop their monetization strategy, craft a compelling narrative, and refine their fundraising collateral.

If you've raised capital or are an early-stage investor, are their other risks that come to mind? Share your insights in the comments below.

Eric M. Jackson is a strategy consultant who advises companies on fintech, AI, product marketing, fundraising, and strategy. As part of Peter Thiel's early-PayPal team, he oversaw the implementation of PayPal's revenue model, and in the years since has created and advised multiple technology businesses. A sought-after speaker and award-winning author of The PayPal Wars, Jackson lives in Los Angeles with his wife and two daughters.