Written by Santiago Aparicio, co-founder of Fitpal and Ontop. (Translated from Forbes).
99% of entrepreneurs try to raise capital in the wrong way. This article will tell you how not to fall into that trap.
The first thing to bear in mind when it comes to raising capital is that there is no magic formula or framework that guarantees results. The process of fundraising is more complicated than it seems and it depends on a lot of factors.
But all is not lost. 99% of entrepreneurs follow the wrong method and are not aware of certain circumstances that can determine whether or not the Venture Capital fund or the angel investor decide to invest.
In one of my conversations with Gigi Levy-Weiss, one of the Partners at NFX, a renowned Silicon Valley fund, he told me that:
“In any given meeting with a VC, the likelihood that it will actually result in an investment is between 1% and 10%. In fact, less than 50% of companies will make it to a second round and, in each of the subsequent rounds, almost 50% of companies will not make it through. It is a very complex process. If it were easy, everyone would do it.”
That said, certain techniques can help entrepreneurs stand out and give them a competitive advantage when it comes to raising capital.
Common Mistakes
- Misjudging an investor’s interest – it happens in the majority of cases: an entrepreneur believes that there is a real interest to invest and wastes a lot of time chasing that belief.
- Changing your terms of investment – in many cases companies offer different terms to different investors. The world of Venture Capital is small and many investors know each other and discuss such things.
- Not having a clear trajectory of how you will use the investment that you are seeking.
- Not offering the founding team sufficient participation in the company – it varies for each stage, but for a Seed round at least 70% is a good bet.
- Not learning from each meeting – learn from the feedback and make adjustments to your pitch deck after every meeting with potential investors.
Raise capital to build something, not to grow
Raising capital requires entrepreneurs to demonstrate that they have the most important quality that every founding team should have – to be capable of building something of value from nothing. Many entrepreneurs wrongly believe that they need investment to sell or to grow. This could not be further from the truth. Build and sell before you start to spend. A good aim for initial growth is to achieve between 7% and 10% in sales growth with zero acquisition cost in the first three months of launching a startup.
Gain interest and attract momentum
Again, the world of Venture Capital is very small and the majority of investors know each other and regularly talk. However, this can also be used to your advantage. The most difficult step for a startup is obtaining that first check because everyone would prefer to invest where someone else has already invested – it gives the impression that the decision has been audited and yielded positive results. This is true for angel investors as much as venture capital funds.
In conclusion, raising capital is a complex process that few achieve. However, it is worth the while to have in mind that there are many ways to go about it, and this is what will determine a successful result. Always seek to make yourself aware of what is going on in the ecosystem and talk to other founders, preferably those whose company is in the same stage as yours. Finally, understand that it is a constant and repetitive process that could last up to 6 months.
Read the original on Forbes.
