You could have an incredible solution to a popular problem; a technology-based idea that you have taken time and scarce resources to create, but without capital, it will never be more than just an idea. Unless of course, you have a stash of money that you’ve been saving for such a time as this. But if not, you have two options: You can attempt to bootstrap your growth or you can raise capital.
I’m a huge fan of bootstrapping, and it can be a viable option if you are extremely cautious when it comes to expenses, if you have a little seed money and if your business concept will generate cash flow early.
If bootstrapping isn’t a good fit, then you need startup capital, which can be gotten from several sources. Lately, news of different startups and how they’re raising hundreds of thousands of dollars in funding have been making the rounds. And I bet as a start-up founder yourself, you’re wondering: “What have I been doing wrong?” Well, you are about to find out those mistakes you need to make sure you avoid when seeking startup capital.
1.You don’t know how much money you need
You might think this is far-fetched but it isn’t at all. I was at an event and Startup founders were called out at random to pitch for investors when it came to the specifics of how much they needed, not many could give a coherent number. A lot of entrepreneurs think they will stand a much better chance of securing funding if they ask for a smaller or an exaggerated amount, but this approach will crush you one of two ways. First, most investors will see that you have no idea what it will take to be successful and walk away.
Even if you do secure funding, though, you will eventually run out of money if you requested less than you needed or mismanage the funds if you requested more than you needed. You need to know how much money you need to start your business, it is then you can articulately specify why you need such an amount. This will put you in a better stance of receiving the capital needed and it will also help your business survive. Most startups fail, so you need to do everything possible to help increase your chance of survival.
2.You are in a hurry to ‘legalize’ your startup-investor partnership.
Given, investors often want an attractive equity stake in exchange for their startup money, and giving up too much equity, in the beginning, can be disastrous. However, you should worry about bringing value instead. By all means, do not neglect the legal aspect of your business but be wary of sending the wrong signals to investors. No one likes to be perceived as untrustworthy.
If you’re concerned, sign a CIPA (Confidentiality and Intellectual Property Agreement) but ensure you don’t over-legalize as this is a common pitfall among startup owners.
3.You don’t have a detailed cash-flow analysis
Anyone who is about to write a check - whether it’s a VC (Venture Capitalist) firm or traditional lending institution - is going to want to see that you have a full grip on the cash-flow and more importantly, how you plan on spending their money.
You have to account for every kobo that comes in and leaves because most business decisions revolve around cash flow. Poor understanding of your own cash flow can lead to having no available cash for day-to-day operations, which will eventually cause your business to collapse.
Developing a cash-flow analysis shows potential investors you have a firm grip on the operational side of the business. Also, a cash-flow analysis is very hard to fake, letting you know just how great your great idea can be.
The ultimate reason for seeking investment is to build a bigger and more effective business. You cannot achieve this without knowing your numbers. It is ridiculous to start a business and not know how much you’ve spent in the capital, how much you need in funding, how much you’re making and even how much you intend to be making in the nearest future. After all, is said and done, numbers are why you’re in business.