According to a study of 101 failed startups, 29% cited a lack of sufficient capital as the ultimate reason for failure. So how can you best approach your search for capital in an attempt to keep your startup from becoming just another one of the roughly 90% that fail? This blog post outlines common pitfalls to avoid and provides recommendations for attracting investors.
Pitfalls to Avoid
1) Target the Appropriate Audience: If you’re looking for early stage financing (under $5 million), don’t waste time on professionally managed venture-capital funds. Instead, focus on angel investors specializing in taking a company from inception to the next stage of financing.
2) Avoid the NDA: Professional investors, including angels, will typically not sign a nondisclosure agreement (NDA) up front, so don’t even ask. You risk being viewed as a rookie before anyone sees your great ideas.
3) Don’t Cold-Call: Your time is valuable, so don’t waste it by sending an unsolicited business plan. Network to get introductions to good prospective angel investors.
4) Keep it Short: The longer the plan, the more likely it will be pushed aside and never picked up again. Think along the lines of a three-page executive summary or shorter.
5) Don’t Aggressively Value Your Business: Investors are nervous to invest after several market collapses, and lower valuations are commonplace. Therefore, proposing an aggressive valuation will be a waste of time. Many successful companies wait to discuss valuation until they have an interested investor.
6) Follow Through: Venture capitalists can’t be counted on to get back to you, so take the initiative to keep in touch.
What Venture Capitalists Look For
1) The Right People: Roughly 23% of failed startups cited “not the right team” as the reason for failure. Build a team that has the skillset, energy, perseverance, network, and passion to build the business. Investors like EXPERIENCE.
2) Big Market Potential: The number-one cause of failure (approximately 42%) for startups was cited as “no market need.” Thus, know your total accessible market (TAM) and be able to explain it to an investor.
3) Micro-Market Leadership: Show you have been able to become dominant with a niche/targeted customer base. Obtaining loyal customers on a small scale shows you may be able to replicate that same loyalty with a larger group.
4) Encouraging Unit Economics: Are your unit economics good enough that rapid scaling seems feasible? Focus on your cost to acquire a customer, the current life-time-value of a customer and the cost to retain a customer, but don’t just stop here. The more you know about the unit economics of your business, the better.
5) Strategic Partnerships: Meaningful strategic partnerships with larger firms are validation that your business is promising and reduces execution risk.