The startup funding process begins by targeting the right investors, seeking connections, and doing research to prepare for meetings. Once all this has been done, the startup’s financing project is on the right track. But at this point, there are still a lot of mistakes that can be made. Bugs that would sabotage the fundraising process. Many have to do with how companies understand, control and communicate their finances, or, instead, the times when they do not.
Failures To Avoid In The Startup Financing Process
Some mistakes can make the fundraising process ineffective. To avoid them and achieve your goal of obtaining financing for the startup, you first need to know them:
- Lack of clarity in financing objectives. If you want an investment, you need to be clear about how much capital you need. This may seem obvious, but it is a common failure. To come up with the figure, first, find out how much money you need to get to the next milestone (whether it’s getting a product out for market testing or some other low-key achievement). Then determine how much capital you’ll need to reach that milestone, from operating costs to essential professional services.
- You are seeking financing too soon. You may not have thought that the sooner you sell your shares, the more it will ultimately cost you in loss of leverage and dilution. Valuation increases offset early dilution, but early financing ups the ante and is often a poor decision.
- You are failing to provide a cash flow analysis. Potential investors want to see that you understand cash flow and how you plan to spend your money. When starting the startup financing search process, it is advisable to monitor the inflow and outflow of cash. Then use that data as the basis for business decisions.
- They are overestimating future income. Financial projections are critical. While a top-down economic forecast may be inspiring, it is just a bogus means of generating unrealistic numbers. While some investors may want to see this, it is best to back it up with a more substantial and reliable top-down forecast.
- Underestimate variable expenses. While fixed payments will remain constant and you can expect to pay consistently, variable costs will vary based on your level of business activity. Of course, there is no way to account for all variable expenses definitively. Still, you can identify the key variables, consider them, and factor them into your calculations, because if you don’t understand your total costs, how can you be sure you can cover them?
- You are raising too much money. More is not better. Raising just what is needed is capital efficiency – a far more telling indicator of business success than access to capital. Not to mention, the more money you raise, the greater your dilution.
- Raise very little money. Of course, the other side of the coin is not raising enough money. Again, milestone funding is the key here.
Lastly, remember that it is good to use the financial model to create a narrative for the business. It’s essential to calculate upfront costs, make financial projections, and analyze your earning potential. These economic calculations are critical to the company, and if they connect, they tell a fascinating story for potential investors.
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