You've done your research, you've got your business plan written, and you're excited about your ideas. Now it is time to raise capital. What now? If you are like most entrepreneurs, when it is time to secure your start-up capital, you want to make the most of your time and resources. There is little time for mistakes.
Aside from your personal funds and borrowing from friends and family, there are numerous routes you can take – each with its advantages and disadvantages. The interest rates you incur from a bank loan can be enough to turn a business sideways, if you even have the opportunity for a bank loan. Most startups don't qualify. Relying on family and friends alone to financially support your endeavor can spawn severe consequences.
Seeking out seasoned and compatible investors, whether it is angel investors or venture capitalists, will not only provide you with the capital you need, but also the business guidance and contacts that can help you along the way. No matter what route you choose, there are red flags along the way that can cost your business its success.
Avoid these top five mistakes in raising capital, and you will save yourself time, effort, and a headache.
1. You underestimated the time and effort of raising capital.
Funding won't come overnight. When seeking out potential investors you may be turned away more than you have braced yourself for. While you may think that your business is guaranteed to be the next Microsoft or Google, chances are it is going to take time and effort to prove that to someone else. Don't be discouraged if the funding process takes you longer than expected. Finding the right investors to commit to your business may take patience, but in the end it will be invaluable to the future of your business. You should plan on spending at least three months and realistically six to ten months to acquire all of your funding.
2. You didn't write a check to yourself.
Start proving yourself and your concept from the get-go. If you aren't willing to invest in your own company, how will you prove to potential investors that your company is worthy of their money? Not only will your previous personal investment instill confidence in the potential shareholder, it will also prove that you are willing to make some early mistakes on your nickel, rather than theirs.
3. You signed on the wrong early investors.
A natural starting point for most entrepreneurs is to seek capital through friends and family. It may be easy for you to gain the much needed support from these people; however, most likely they aren't accredited investors, and this may make many accredited investors run from the deal. Money from a seasoned investor is more valuable than money from an inexperienced family member.
If you do have to get capital from family, have it well documented. We've seen the "Uncle Bob" type who thinks the money is a loan when the business is going bad and it's equity when it is going great.
Choose your early investors wisely, and your patience will pay off in the end.
4. You overvalued your opportunity
It is better to have 50 percent of something than 100 percent of nothing. A few entrepreneurs will hold out for a higher valuation and their company runs out of money. Move forward with the early evaluation to continue receiving funding.
5. You were your own business partner.
For real estate investors the rule is "location, location, location." For angel investors, it is "management, management, management." Two heads are better than one – especially if one of those heads is an experienced executive. Finding someone with the resources, contacts and business understanding is key when persuading investors to buy into your company. Investors appreciate experienced management more than any other characteristic when assessing a company's potential. If you want someone to give you money, find a business partner with executive credibility and experience.