Common mistakes founders make when fundraising, specifically focusing on demanding pricey valuations and negotiating against oneself.
Common mistakes founders make when fundraising, specifically focusing on demanding pricey valuations and negotiating against oneself. It emphasizes the importance of aligning valuation expectations with market realities to avoid signaling a lack of experience to investors.
Hi, everyone. This is Alejandro Cremades, and today we’re going to be talking about the common mistakes that entrepreneurs make when fundraising. Fundraising is tough; it’s challenging, and also, if you do not understand the story well, the process, and how to fulfill concerns, there are always going to be common mistakes that you’re going to be making. So, the idea of today’s video is to give you an understanding of what those typical mistakes are that entrepreneurs make in the journey of raising the money, and how to avoid them. With that being said, let’s get into it. One of the mistakes that I see is demanding pricey valuations. Essentially, going out to market with a valuation that may not really adjust to what the market is paying. I think if you go out either with a valuation that is off-market, meaning that your competitors are raising maybe half of that or much less than that,
then you’re putting yourself in a position where the expectations are going to be high, and it’s going to be very tough, and you’re sending a signal where you’re not really sure or know what you’re doing. The same comes with the amount that you’re raising. If, for example, if you’re in New York, or you’re in San Francisco, and you’re doing a seed round, and you’re raising $500,000 rather than the average $2 million, then already you’re telling the market that you’re underfunding yourself. So when it comes to numbers and also valuations, make sure that you’ve done your homework and take a look at some of your direct and indirect competitors so that you have an understanding and have some type of benchmarks in pricing your round. The next common mistake is negotiating against yourself. The last thing that you want is when you are, let’s say, out there; you’re speaking with investors, and
then all of a sudden, the question comes around, “What is your valuation? Have you thought about your valuation, or what kind of valuation are you thinking for this round?” The mistake that entrepreneurs always make is talking first. You do not want to throw out a valuation because what’s going to happen is, let’s say, if you say an answer like a $50 million valuation, then the investor is probably going to tell you, “Well, we think this is $10 million.” They’re going to negotiate you down. So, try to shift it around. Try maybe to answer to that saying that you’re seeking some partnerships here rather than negotiating where, in a negotiation, there’s always someone that loses and someone that wins. You want this to really be a successful partnership where everyone wins. And doing that, you’re actually asking them to throw in their valuation so that you don’t have to talk. With that being
said, when they throw the number, essentially, if they say $10 million, maybe you negotiate them up, and you throw $15 million, and maybe you meet in the middle. So, by them speaking first, you’re really saving yourself the opportunity of negotiating them up rather than them negotiation you down if you’re talking first. The next mistake or the next common issue that I find on entrepreneurs is not building a network. Building a network is critical. Fundraising is all about building trust with the parties that are potentially going to be interested in investing in your business. With that being said, you want to make sure that you’re building your network way before you actually need the money. A good way to do this is taking a look at who are the investors that have been very actively investing in your segment for the past 12 months, and perhaps you grab those indirect competitors that
have received an investment from that investor in the last 6 to 12 months. You ultimately use them as a way to get your foot in the door, to get into the circle of trust, and to reduce the amount of time that it takes from the first touchpoint to money in the bank. That is how you build your network. You can also do so by going to conferences, but really there is no excuse for not being able to get in front of investors because right now, we live in a world that is super connected, super transparent, and you can see at all times who is investing in what. The next common mistake is pitch decks. Storytelling is everything when it comes to fundraising. You want to make sure that you have an amazing pitch deck that, in 15-20 slides, is “capturing” the essence of your business. Again, below, you’re going to find a pitch deck template that you can just grab and use for yourself. But,
essentially, storytelling is really what is going to make it or break it. Remember that, on average, investors only spend 2:41 (two minutes and 41 seconds) per presentation. That’s it. They’re just going to be skimming through it, and then at the end of it, they’re going to be able to really understand if you’re going to be worthy of another meeting, or even a first meeting or not. For that reason, you want to make sure that you follow a really good flow, a really good structure, and that you keep the balance between the amount of visuals and the amount of text that you use. Typically, for sending emails with a presentation, you want to have it a bit more robust in terms of content. And if you’re pitching at an event or a conference or maybe even in front of the investor, you want that presentation to be more on visuals and less on text so that you can keep the eyes on you, and they can
connect with you because that connection is super important. The next common mistake is not selling yourself. At the end of the day, we are all walking brands. If you take a look at a company like Facebook, that’s Mark Zuckerberg; Apple, that’s Steve Jobs; you’ve got to sell yourself. Again, this is sales. Fundraising is sales. You need to keep an airtight process, and you need to really know where every single lead and every single prospect is in that pipeline. And you need to pipeline and pipeline and walk them from one phase to the next phase because, really, it’s all about going from intro to money in the bank. Your real intention or the way that you should aim at doing this is that every single interaction with an investor that you have needs to have a call to action. Forget about the “Let me know what you think,” or “Look forward to your comments.” You’ve got to always finish every
single interaction with, “Are you available next week or the following for a catch-up meeting.” Because you’re going to be following up, you’re going to be following up with exciting updates on the team, press mentions, milestones, so every follow-up that is adding value. Make sure that it’s really ending with a call to action to get you to the next meeting because remember that fundraising is all about addressing concerns. The more meetings that you get, the more concerns that you’re able to resolve, and the more concerns that you resolve, the closer that you are to the money. The next common mistake is non-disclosure agreements. The NDAs, at the end of the day, and this comes from me that I’m a recovering lawyer – you know, still seeking therapy – is that at the end of the day, an NDA, you’re not really going to be able to enforce it because it’s always subject to interpretation. I
find that those entrepreneurs that just for having an introductory meeting with an investor, and they go with the NDA, you’re going to essentially tell the investor that you’re a rookie and that this is the first time you’ve done it. You are only pulling the NDA card once you have gotten that interest from the investor, and things are progressing well enough into a due diligence process where they’re going to have access to sensitive information. Until then, refrain from putting any type of NDA in front of them. You want to make the process frictionless, and you do not want to add more friction to the actual process. The next common mistake is, obviously, not connecting on a personal level. Every single first meeting that you have make sure that you have researched like, “What are they tweeting about? What kind of groups do they follow on LinkedIn or maybe on Facebook?” Maybe they went
to the same college that you did, or they are supporting the same sports team that you’re supporting. Essentially, on every goal, the first goal, you want to build that background relatedness. You want to connect at a personal level and really see you as that individual that they’re going to have fun, maybe like having a drink outside of work because this venture capital firms, specifically, or any type of investor, they want to do business with people that they enjoy and that they like. So, with that being said, don’t go straight into the pitch deck, into the business discussion. Try to keep it personal at the beginning, and then naturally, it’s going to smoothly transition into the business talk. The next common mistake that I see is not focusing on the network behind the money. At the end of the day, it’s not about the money. You’ve got to turn it around, and it’s all about the
network that that…