Part 4 Some 🤦‍♂️ fundraising mistakes

Raising a seed round of financing from a venture capitalist can be a challenging process for early-stage founders. Early stage venture capital is often subjective and irrational, making it difficult to understand without clear-cut answers.

This is why learning from others can be so helpful.To help you avoid some common mistakes, here are some of the things to keep in mind:

Optimizing for valuation or unrealistically valuation expectations

Recommendation: This can be the downfall of many deals, the inability to align on price, usually because the investor smells blood in the water or the founder is too emotionally attached to think rationally about how the industry values the company. The best way to solve for this is multiple term sheets. It is always ok to ask the investor how they came up with that valuation, and use that as a framework for discussion while you try and get another term sheet.

Pitching to growth investors for seed capital, or seed capital from growth investors

Recommendation: Research the stage at which the investor can invest beforehand to avoid pitching to an investor who cannot invest in your business.

Consider the following criteria:

  • Revenue minimums
  • Valuation minimums
  • Industry focus
  • Ownership requirements
  • Fund stage (already deployed, not yet closed)

Investors will often take meetings because they like to learn. However, don't let them learn at your expense.

  • Revenue minimums
  • Valuation minimums
  • Industry focus
  • Ownership requirements
  • Fund stage (already deployed, not yet closed)

Investors will almost always take meetings because they like to learn. Don’t let them learn at your expense.

Hiring the right resumes, wrong people

Recommendation: Don’t be afraid to make the right decision for the business. Keeping the wrong person, especially the wrong executive, around the table shows just as much about your ability to lead as having a gap on your team. Gaps can be filled, but hiring people that are not driving your business forward is painful, even if you have to fire your CFO in the middle of a fundraise.

Trying to make everything look perfect and hiding risks.

Recommendation: Investors know businesses have risks, challenges and some skeletons. Think of it like dating. You don’t open with your bad traits, you start off with your best qualities and then slowly reveal the skeletons over time.

Signing a term sheet before reviewing with a lawyer

Recommendation: Term sheets are filled with terms that are unique to fundraising, and can be quite confusing. Investors are professional negotiators who optimize for capital returns in good times and bad. Using a lawyer who works on venture term sheets will help you understand terms, and also can play “bad cop” if you don’t already have board members.

Don’t forget to do reference checks on board members

Recommendation: You cannot divorce a board member, so make sure that you are aligned on vision, style, and talk to founders who they have backed (it’s usually on their websites). Find a founder whose company wound down and ask them how they behaved… you will learn a lot.

Picking the right fund, but not the right partner

Recommendation: I frequently encounter founders who place too much emphasis on brand name. While there are certainly benefits that come with a strong brand (such as future fundraising, partnerships, and hiring), it is important to remember that the partner who makes your investment is the one who sits on your board or controls the votes. A junior partner at a well-known firm may or may not be better than an industry leader at a lesser-known firm. Therefore, it's important to choose wisely.

Underestimating the amount of time it takes to fundraise

Recommendation: The more you can prepare in advance, the most you can increase the chances of creating FOMO, running a fast process by avoiding back and forth

Not optimizing for FOMO

Recommendation: Either fundraise or don’t, but time is your enemy. You want to have as many investors interested, at the same time, to increase the chances of a term sheet. The saying is you get 3 term sheets or 0 term sheets.

Being underprepared for due diligence

Recommendation: Keep your core items organized and ready for diligence, such as financial statements, cap table, revenue contracts and employee documents. The more that your fundraise story, questions, supporting docs and diligence process are ready, the more time you can spend actually talking to investors instead of answering questions.

Don’t fundraising when the business is not ready (if you can avoid it)

Recommendation: Always be prepared with your deck, projections, data room, so when the business hits the right milestone, you are ready to fundraise easily. Sometimes this cannot be avoided, unexpected expenses come up or milestones take longer. This is one of the justifiable cases to building relationships with VCs in advance.

Being secretive to the point that you lose trust
  1. Recommendation: Ask a lot of questions (”why is this important?”) to understand the intent behind the question. While you don’t need to answer every question, or go overboard, it is important to build trust with an investor as they are on your cap table forever.
Financials projections don’t exist, don’t match your story, are too optimistic or not optimistic enough.

Recommendation: Have a base and optimistic case