Most new and existing businesses can benefit from outside funding. With such funding, they can grow faster, launch new initiatives, gain competitive advantage and make better long-term decisions as they can think beyond short-term issues like making payroll.
Unfortunately, though, most entrepreneurs and business owners make several mistakes that prevent them from raising capital. These mistakes are detailed below. Avoid them and funding could be yours.
Making unrealistic market size claims
Sophisticated investors need to understand how big your relevant market size is and if it’s feasible for you to eventually become a dominant market player.
The key here is “relevant” and not just “market.” For example, if you create a medical device to cure foot pain, while your “market” is the trillion-dollar healthcare market, that is way too broad a definition.
Rather, your relevant market can be more narrowly defined as not just the medical devices market but the market for medical devices for foot pain. In narrowing your scope, you can better determine the actual size of your market. For instance, you can determine the number of foot pain sufferers each year seeking medical attention and then multiply that by the price they might pay for your device.
Failing to respect your competitors
Oftentimes companies tell investors they have no competitors. This often scares investors as they think if there are no competitors, a market doesn’t really exist.
Almost every business has either direct or indirect competitors. Direct competitors offer the same product or service to the same customers. Indirect competitors offer a similar product to the same customers, or the same product to different customers.
For example, if you planned to open an Italian restaurant in a town that previously did not have one, you could correctly say that you don’t have any direct competitors. However, indirect competitors would include every other restaurant in town, supermarkets and other venues to purchase food.
Likewise, don’t downplay your competitors. Saying that your competitors are universally terrible is rarely true; there’s always something they’re doing right that’s keeping them in business.
Showing unrealistic financial projections
Businesses take time to grow. Even companies like Facebook and Google, with amazing amounts of funding at their disposal, took years to grow to their current sizes. It takes time to build a team, improve brand awareness and scale your business. So, don’t expect your company to grow revenues exponentially out of the gate. Likewise, you will incur many expenses while growing your business for which you must account.
As such, when building your financial projections, be sure to use reasonable revenue and cost assumptions. If not, you will frighten investors, or worse yet, raise funding and then fail since you run out of cash.
Presenting investors with a novel — or a napkin
Your business plan should not be a novel; investors don’t have time to wade through 100 pages to learn the keys to your success. Conversely, you can’t adequately answer investors’ key questions on the back of a napkin.
A 15- to 25-page business plan is the optimum length to convey the required information to investors.
Not understanding your metrics
How much does it cost to acquire a customer? What is your expected lifetime customer value?
While sometimes it’s impossible to understand these metrics when you launch your business, you must determine them as soon as possible.
Without these metrics, you won’t know how much money to raise. For instance, if you hope to gain 1,000 customers this year, but don’t know the cost to acquire a customer, you won’t know how much money you need for sales and marketing.
Likewise, understanding your metrics allows you and your team to work more effectively in setting and achieving growth goals.
Acting like know-it-alls
While investors want you to be an expert in your market, they don’t expect you to be an expert in everything. More so, most businesses must adapt to changing market conditions over time, and entrepreneurs who feel they know everything generally don’t fare well.
A good investor has seen many investments fail and others become great successes. Such experiences have made them great advisors. They’ve encountered all types of situations and understand how to navigate them.
If you’re seeking funding, acknowledge such investors’ experiences. Let them know that while you are an expert in your market, you will seek their ideas and advice in marketing, sales, hiring, product development and/or other areas needed to grow your business.
Focusing too much on products and product features
When raising funding, you need to show you’re building a great company and not just a great product or service. While a great product or service is often the cornerstone to a great company, without skills like sales, marketing, human resources, operations and financial management, you cannot thrive.
Furthermore, if your product has a great feature, be sure to specify how you will create barriers to entry, such as via patent protection, so competitors can’t simply copy it.
Exaggerating too much
When you exaggerate to investors who know you’re exaggerating, you lose credibility.
One key way to exaggerate is with your financial projections as discussed above. There are many other ways to exaggerate. For instance, saying you have the world’s leading authorities on the XYZ market is great, but only if they really are the world’s leading authorities.
Likewise if you say it would take competitors three years to catch up on your technology, when investors ask others in your industry, they better confirm this time period. If not, your credibility and funding will be lost.
What do investors care about? They care about getting a return on their investment. As such, anything you say that supports that will be welcomed.
For instance, talk about your great product that has natural barriers to entry. Discuss your management team that is well-qualified to execute on the opportunity. Talk about strategic partners that will help you generate leads and sales faster.
But, don’t go off on tangents that don’t specifically relate to how you earn investors returns, like the fact that you’re a great tennis player.
Likewise, conveying too many ideas shows you lack focus. For instance, saying you’re going to launch product one next year, and then quickly launch products two, three and four, will frighten investors. Why? Because they’ll want to see product one be a massive success before you even consider launching something new.
Investors have two scarce resources: their time and their money. Avoid the above mistakes when you spend time with investors, and hopefully they’ll reward you with their money.