Watch Out for These 9 Seed Funding Gotchas
Chance favors the prepared mind. — Louis Pasteur
The reality is most startups need to raise funding to grow, and to become real companies. It’s not typical that a company can make money if it doesn’t fundraise, and certainly very unlikely that anyone will make any money if your company does not grow.
One of the objectives of the companies going through Techstars and other accelerators is to secure financing. Most companies are coming in to focus on accelerating their businesses and then securing capital to continue to accelerate growth. So we love it when companies get funding.
Related: Avoid the Seed-Funding Surge Trap With These 8 Tips
But we’ve seen a clear pattern with the companies that rush into funding too early. Why? Here are the nine gotchas of seed funding that will help you understand what goes wrong.
1. Lack of preparation
To be ready to fundraise you need to have strong knowledge of the problem you are solving, the reasons you started this business and your customers, market opportunity, competition, distribution channels, pricing and burn rate, among many other things.
You are going to be asked a whole lot of questions and then some by potential investors. If you are not prepared it will come through and will be a big turn off.
2. Lack of traction
Very few companies get seed funding without some kind of traction. Unless your team consists of successful serial entrepreneurs, and even then, investors expect customer/user traction. This does not mean perfect product market fit. It means early evidence that there is a problem and your solution or product is going to have a shot at addressing it.
3. Being pulled into fundraising
So you weren’t thinking about raising money, but you met a bunch of investors, and they said that you really should. Other founders around you said you should too. You then decide, “what the heck, I will give it a shot.” It is a mistake. You are not ready, you didn’t prepare, you didn’t plan.
Don’t fundraise on other people’s turf and time. Control your destiny by preparing, checking the boxes and then going out and raising funds. No one is going away, and investors will not say no to a meeting with you later if you said no to them when you were not ready.
4. Chasing the wrong people
This is a big one, and it is bad. All investors are different. They like different verticals. They write checks of different sizes. Just because they are an investor does not mean they are the right investor for you. Doing research, understanding what a particular investor likes and why you might be a fit is important. It is equally important to get an introduction from someone who knows you and knows the investor.
5. Not pitching angels and venture capitalists correctly
Angel investors, VCs and micro VCs are all very different in terms of their objectives, styles and consequently how they need to be approached and pitched. An angel investor who invests $25,000 to $50,000 may want a couple meetings, a micro VC that writes $100,000 to $250,000 checks will be engaged for a month, and may or may not lead. VCs take the longest, write the biggest checks and like to lead rounds and take board seats.
If you don’t understand how to engage each category of investors correctly, you will waste time and may not get the desired result.
Related: 4 Options for Raising Capital From Friends, Investors or Even the Feds
6. Not having an overall strategy
Even if you know who you are going after and why, you still need a strategy. A strategy would entail planning the entire fundraising process, who to meet with first and who to meet with later. Do you start by raising a few hundred thousand dollars from angels first, or do you go straight to VCs?
Making the right decisions about your financing strategy, especially if you are a first-time founder, is really important. Not having a plan increases the chance of not raising the capital you need to grow the business.
7. The “I am special” problem
Of course you are! Me too. Aren’t we all?
When you go to a casino and gamble, you think — all these poor suckers around me, they are going to lose, but me? No, no, no. I am a winner. This is sad, because as an entrepreneur you actually are special. All of us are. We are this crazy, courageous, relentless unstoppable breed. But the reality is that it is not a good bet to make when it comes to seed funding. You are better off being prepared and winning because of that.
8. Not realizing you are running a race
When you are fundraising, the word travels around. Investors are people, and they talk. Not because they are bad or against you. It is natural to compare notes in any industry, and VCs are no exception.
When you are going out to raise, you need to do it quickly, and get all the conversations aligned. Once you start raising you have to run the race until you are done or you decide to stop because it just isn’t coming together. Realize that this is the race before you enter it.
9. Running out of bullets
It may be a funny analogy, but it makes sense. In the beginning of the process you have a loaded gun, and you start firing shots and start having all of these great conversations. Then at some point, especially in smaller ecosystems, you find that you’ve talked to pretty much everyone. There is no one left. You just fired all your shots, and your gun is now empty.
The bad news is if you already met with all investors, and they didn’t write you a check, then you can’t go back to them next month and try again. The good news is that you actually can go back to them in six months and show progress. If you are crushing it this time around you will get the check.
It takes a while to reload the gun, and the only bullets allowed on reload are real traction bullets.
How and when to fundraise
So how do you actually win this and get funding? Preparation and traction.
Get everything in order: your deck, pitch and funding strategy, who you are going to talk to and why, introductions, etc.
But even if you are prepared, it may not be enough this day and age. We see less and less people funding ideas and decks. Investors want to see early traction — some sort of indication that not only your idea is great, but that you talked to customers, built a minimal viable product and have some kind of traction — proof that you can do it and it may work.
And if you find it too daunting and complicated — get help! Talk to fellow entrepreneurs who’ve done it before. Apply to Techstars and we can help you accelerate the business and raise funding. Really think through the funding. Prepare, be thoughtful and win.
This article was written by a member of the AlleyNYC contributor network. AlleyNYC is one of the world’s largest innovation hubs, helping foster the growth of startups in its flagship location in New York City. Entrepreneur Media is a partner and investor in AlleyNYC. If you would like to learn more about AlleyNYC and how to apply for membership visit here.