7 Pitfalls to Avoid When Raising Startup Capital
"You can ruin your company within the first few days of forming it," says Jay Jacobs, and he would know. With a wealth of experience, ranging from being a vice president for an investment bank to stepping into the role of CFO at a publicly traded company (Houston American Energy Corp. (NYSE Amex: HUSA)), Jay Jacobs understands exactly what to do—and what to avoid—when raising capital for your business.We were lucky enough to spend some time talking to Jay, who offers his top financing tips to everyone from startups to major corporations. Avoid these 7 pitfalls of raising capital, according to Jay:
1. Putting the Cart Before the Horse
It's easy to have a great idea and race towards raising capital, but without a solid business plan and some research into what investors are looking for, you'll often fail to get the capital you need. Think of your quest for capital as a horse race: the fastest horse out of the gate doesn't necessarily win the race. Often, the win rests on the skill of the jockey (or business owner) and the ability of the horse to outlast competitors that tire out quickly.To beat competitors vying for seed money, you need a surefooted business plan with key investment points, market analysis, financial projections and proposals. As your business plan is the primary motivator for investors, you'd be wise to spend as much time as possible ironing out the kinks before you ask for the cash.Check out the SBA's Business Plan Template.
2. Fudging the Finances
You can have the most brilliant business idea, but if you don't understand financials and can't convey your understanding in detail, then you won't get what you want out of investors. "When reviewing a company I want a thorough financial model, industry analysis and economics on a project," says Jay. "I've also reviewed business plans for entrepreneurs who don't have realistic or accurate numbers and it is an immediate red flag."If you aren't financially savvy or if you simply want a second opinion, Jay suggests finding someone to advise you on the finances. You can consult friends or family members with the right background or choose to hire a professional, but either way it's time or money well spent.
3. Running an Army of One
Startups typically begin with one or two bright-eyed entrepreneurs. But, before you can convince investors of potential success, you need to secure a management team that can earn the revenue that will get you off the ground and handle the cash flow responsibly. "There's sort of a chicken and egg problem with securing your team and raising capital," claims Jay. "How do you get a great team without first having the capital to hire them?"One solution, Jay advises, is to hire the right people as part-timers, contractors or consultants until you have the means to transition them into full-time employees.Check out our blog post on Where to Find New Employees.
4. Failing to Match Up Interests
To increase your chances of securing capital, you need to research and identify your target investors and match up interests. "A person looking to raise early stage venture capital wouldn't have much success in targeting investors who are risk adverse," Jay says. Obviously, you're going to have vastly different experiences with friends and family members than with venture capitalists or angel investors. Whichever route you take, make sure you thoroughly understand the needs and interests of investors before making your pitch. Also, be wary of having too many investors who may have conflicting interests.
5. Staying in Your Comfort Zone
Tapping friends, family and colleagues in your local area for capital is a good first step, but chances are there is a limit to how much you can raise in your area, especially if you're in a small town. Be willing to expand your search and travel to investors in different locations who could substantially increase your capital.
6. Losing Momentum in the Paperwork
Having the proper subscription documents ready for investors can be very important when you meet with investors. "Don't lose momentum by failing to have thought out how you are going to structure your investors' investment." Jay warns. "I've seen people spend up to six months trying to finalize valuations and send paperwork over to investors." During that time, investors could lose interest and fail to act. To avoid losing investors, have somebody on your end follow through on getting the paperwork ready and signed in a timely manner.
7. Writing-Off Your Appearance
You may not like to think so, but dressing the part can be to your benefit. If you're meeting fellow Internet guys, you don't have to show up in a coat and tie, but if you're going to a big financial institution, then you'll probably want to dress more professionally. Again, it's about conveying that you understand who your investors are and what they require. But, on the flip side, you should stay true to your own company culture and viewpoint. If they aren't cool with your jeans and T-shirt look—or your coat and tie—perhaps you might not want them engaging in a business relationship with you after all. Like the tips you've read here? Sign up for the ChooseWhat Newsletter for more articles and posts!