The Funding Game: Common Mistakes During Investment Rounds

As a business grows, securing sufficient funding is essential. However, the funding process can sometimes lead to negative outcomes, leaving investors feeling uncertain and trapped. This is because they are often presented with a polished business plan promising revenue and profitability, but the reality often turns out to be different, with monthly or quarterly performance reviews yielding lower and lower results post-funding.

Unrealistic business planning

I have seen this play out in many B2B businesses. In one particular instance, while I was reviewing the business plan for a CEO and his management team. They were preparing for the plan to be sent to potential investors, and I noticed a substantial jump in revenue in the second month, with subsequent jumps month over month. Their justification for this was that they had to increase it this way to reach the pre-set end results. When I asked about the plan to achieve these numbers, the answer was, “We will hire more salespeople,” with everybody convinced that this would be easily possible. However, this seemed to me like a very unrealistic solution. The team had not considered that it takes an average of 45 days to hire a salesperson, another month for onboarding and training, and two more months to convert a lead to a client. There was no detailed data on potential target clients or the value proposition that would convince them to convert. Essentially, the business development machine was not yet in place.?

This is not the only time I have witnessed a poorly planned funding model. In a different business with a similar unrealistic business plan, I was told that the figures had been artificially inflated to seem more attractive to investors and therefore raise more funds. The plan was to revise the targets to a more realistic level after the funding round was secured. Unfortunately, both of these businesses raised the necessary funds yet continued to burn cash.

Realistic business planning

On the other hand, I have also worked with businesses that approached the funding process much more realistically. They set targets based on current actuals and provided transparent, logical justifications for growth, including detailed plans for actions and expenses. These businesses did not present a rosy picture but a realistic one, and this approach is always more attractive to investors.

The case for transparency

In today's market, with cautious investors and a plethora of alternatives for investment, it is crucial to have realistic expectations from the outset. I have always advocated for transparency and setting the right predictions from the beginning. Inevitably, this will require some difficult conversations with the board, investors, or stakeholders to ensure alignment and success, but in the end, it is a much better strategy than kicking the can down the road. On the other hand, painting an overly optimistic picture to attract investors and hoping for a miracle in the future is a surefire way to end in disappointment.

How to prepare for fund-raising properly

A key factor to consider when preparing a business plan for funding is to demonstrate a solid understanding of the market and competition. Investors want to see that the company has a clear plan in place and is prepared to face potential bumps in the road as the business grows. Presenting a thorough analysis of the market and competition, as well as a unique value proposition and a well-thought-out sales strategy, can help to instill confidence in investors and increase the chances of securing the right funding.?

In today's interest rate environment and investment conditions, it is more important than ever to approach the funding process with transparency and realism.

Investors are more cautious with their money and are overwhelmed with alternatives. A good business model, a strong and knowledgeable team, and realistic results are always a much more attractive proposition for the right investors.

For more business tips, Live events and to join our community, follow the Zeder Business Advisory LinkedIn Page, or subscribe to 'The Profitable Business Podcast' anywhere that you listen to your Podcasts.?