Fundraising has few guidelines and you won’t get feedback from most investors who pass. You will have more success and spend less time fundraising if you avoid the familiar pitfalls. Here are 3 of the most common mistakes and how to avoid them:
Raising without Customers
Fundraising without customers is asking an investor to believe in two untested hypotheses: 1) you’re solving a real problem and 2) you can build something people use. However, an investor will rightly question ‘why is nobody willing to use it?’. Here’s how you handle the common cases:
No customers closed — Continue customer development until someone is engaged with your product. If you have cash flow issues, offer consulting work to attract a customer and pay your bills. Ideally, this would be upfront development fees for custom work but you may need to settle for more general contract work.
Almost closed a customer — Discuss their pricing expectations and ask them to sign a “Letter of Intent” (LOI). The LOI should include details on what is being deployed and its rough cost. A few LOIs may convince an early stage investor.
No paying customers — Make sure your live customers are overjoyed with your product and support. Try to get positive references from them ASAP. If they’re on a free trial or pilot, make sure the agreement has a clear timeline for payment.
Highlighting the Average
If you don’t clearly explain why your company is special, you’re hoping investors will figure it out themselves. You must peak an investor’s interest early, as most meet hundreds of companies a year, to only invest in a few. Here’s what most founders highlight:
Growth — 15%+ growth, month over month, is the goal; ideally sustained over the last 3 to 6 months. If you’re not growing that fast don’t try to present a rosier picture with lower numbers. Instead discuss your current distribution channels, how they will grow and the new ones you’re testing to hit your goals.
Team — Good schools aren’t enough to be your differentiator. Emphasize this if you’re a serial entrepreneur with previous exits or if you have international recognition for your expertise.
User Experience — Don’t present your app as a better experience without evidence. A demo and testimonials from key use cases is the minimum needed. If you have 50+ customers you can demonstrate customer satisfaction with a Net Promoter Score or engagement metrics like Daily Active Users.
Lower Pricing — Don’t talk about this unless you have unique technology, for example: Skype’s voice technology allowed them to provide completely free international calls. Otherwise, when you’re winning on price, investors get concerned about competition suppressing your margins.
Regardless of a company’s metrics, investors still get excited about a good story. Bored and distracted, an investor is unlikely to ask questions and will quickly discount your company. Here are the common scenarios:
Not Enough Practice — During demo day build up, I often recommend you practice 10 times a day. Film yourself doing the pitch end to end (your phone is enough); most people hate watching themselves so much they improve rapidly.
Badly Organized Story — Do not pitch casually. Stand up and deliver the concise version of the story, reinforcing your conclusions with data. Don’t put too much detail in the presentation, much better to get an investor excited and asking questions. Make sure you’re well prepared for common questions as weakness here will be a stark, negative contrast with your rehearsed performance.
Fundraising is hard enough without you hurting your own chances. Make sure you have satisfied customers and can clearly explain why your company is different. If you present these facts well, investors get excited and fundraising becomes a lot easier.
This article is part of a series on Seed Fundraising.
1. When to Raise Money
2. How to Build a Deck
3. VCs vs. Seed Funds vs. Angels
4. How to Get a Meeting
5. How to Request an Introduction
6. How to Get Early Momentum
7. How to make a Good Pitch Great
8. The 5 Most Common Pitch Mistakes
9. Meeting Requirements
10. The Basics of Meetings
11. How to Handle an Angel Investor Meeting
12. Know these Numbers for your VC Meeting
13. 4 Investor Gotcha Questions
14. How to Follow-Up After an Investor Meeting
15. How to Close the Lead Investor
16. The 4 Stages of a VC Process
17. How to Raise a $2 Million Seed Round
18. Go from Investor YES to Cash in Hand
19. When Investors Say Yes but Mean No
20. When and When Not to Use an Investors Name
21. Stop Making These Common Fundraising Mistakes
22. How to Avoid Bad Terms that Kill Startups
23. What to do After Receiving a Term Sheet
24. Term Sheet Problems Part 1 — Money Talks
25. Term Sheet Problems Part 2 — Boardroom Blues
26. Term Sheet Problems Part 3 — Side Letters
27. 10 Traits of Successful Founders
Sterling Road invests in pre-seed B2B startups based in North America. Full process here: sterlingroad.com/process.
You can reach me here: email@example.com
Thanks to Kaego Rust for reading drafts of this.