Many entrepreneurs need a large amount of cash to launch or grow their startup businesses. When you’re passionate about the potential of your idea, pitching to outside investors can seem like a simple and obvious way to obtain that much-needed cash.
However, first-time entrepreneurs often make mistakes when engaging with private investors, from not asking for the right amount of money to giving up too much control of their businesses. Here, Forbes Finance Council members share some common mistakes entrepreneurs make when attempting to raise capital through private investors. No matter what stage of funding you’re in, this expert advice can help you avoid common pitfalls and improve your chances of raising the money you need to grow.
Members pictured from left to right.
Entrepreneurs underestimate the time their deck and story have to make an impression—90 to 300 seconds is all you have. Stop focusing on what makes you excited and use your short time to highlight the areas that get private investors excited. What is the total addressable market? Do you have a team with the knowledge and skill required to build and execute? Do you have strategic relationships to act as a catalyst? – Karl Rogers, Elkstone Private
Entrepreneurs often underestimate the time it will take to get from revenues to profitability and to have an adequate cash flow to repay investors within the agreed-upon timeline. An entrepreneur needs a solid business plan with a clear Use of Funds Schedule for their capital raise. A Use of Funds Schedule is key to getting the business to profitability and not squandering the capital. – Karla Dennis, Karla Dennis and Associates Inc.
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
It’s a mistake to give away too much “pure” equity instead of offering a lesser amount of equity with some repayment terms (“preferred equity”). Typically, preferred equity investors will accept a lesser ownership stake than true equity investors, as you’ll be giving them a repayment stream during the time of their investment or until you buy them out. Equity always costs more than debt, so preserve as much of it as you can. – Christopher Hurn, Fountainhead
The biggest mistake entrepreneurs make when attempting to raise capital is not bothering to do their homework on the private investors from whom they are accepting funding. It is so important to align your business with investors who will help you achieve the goals (particularly if there are impact goals) that are best for the company and existing stakeholders, not just the new investors. – Jaclyn Foroughi, Brazen Impact
Entrepreneurs are often over-optimistic and insufficiently rigorous when estimating fundraising timelines. Revenue projections can sometimes be high, but projected fundraising timelines are universally too short. Investors can deliberate, ask for more due diligence or run into issues with other investments that delay them. Entrepreneurs should estimate fundraising timelines and then double them. – Andrew Glaze, Wealth Stack
One mistake entrepreneurs often make when attempting to raise capital for their businesses from private investors is misjudging the time value of money and the total cost of capital. One needs to fully understand the time it takes to raise capital, the total costs of the capital and if the time value of money aligns with projected milestones. Any miscalculation can diminish the initial objective. – Kacey Butcher, Adaptation Financial
It’s easy to become excited about private investor funding. Many entrepreneurs mistakenly prioritize money over investor experience. You must be able to explain your company’s mission, its solutions and its growth to convince investors that they have something valuable to give and that their dedication will pay off—financially and emotionally. – Neil Anders, Trusted Rate, Inc.
Many entrepreneurs mistakenly take on private capital without doing the necessary homework. Know what an investor’s expectations are in regard to growth and who is in control. Bring on a team of advisors to make sure the financial objectives of the company are aligned with private equity before you sign on the dotted line. Don’t waver from what’s important to the company’s mission and long-term goals. – Letitia Berbaum, The Zandbergen Group
A lot of first-time entrepreneurs give up control early to initial investors and advisors. This makes it difficult to seek additional financing rounds. In addition, it is important for entrepreneurs to seek the right type of investor, especially in earlier rounds. They need an investor who is able to add value and provide strategic advice to grow the company. – Ben Jen, Ben Jen Holdings SLLC
Instead of simply relying on a business plan to attract investors, entrepreneurs should take a more holistic approach by providing potential investors with additional proof that their venture will be profitable and successful. For example, showing potential investors metrics such as revenue growth over time or a customer base that is expanding rapidly can help establish your venture’s credibility. – Angelo Ciaramello, The Funded Trader
Entrepreneurs can sometimes emphasize what they get more than what they give up. Sometimes outside capital is the only way to grow. But losing control of a business to investors can have a devastating impact on an entrepreneur’s life. Know what you’re giving up and be sure it’s worth it. If there are other ways to achieve your goals, thoughtfully consider those. Careful reflection today could prevent heartache tomorrow. – Todd Sixt, Strait & Sound Wealth Management LLC
One massive mistake entrepreneurs may make is selling themselves short. Not all capital is good capital, and while the allure of a cash infusion may be tempting, don’t sell yourself or your business short. If the terms don’t seem reasonable to you or if the ask from the investor is too high, don’t be afraid to say “no”—it may end up saving you from problems down the road. – Sean Frank, Cloud Equity Group
The first mistake is thinking outside investment is 100% necessary to get a business up and running. There are many, many alternative paths to financing a startup, including self-funding. Known as bootstrapping, this method of entrepreneurship means business owners won’t have to answer to stakeholders and will be able to make key decisions without outside input. – Austin Mac Nab, VizyPay
One mistake entrepreneurs make when attempting to raise capital for their businesses is not asking for the right amount. In many cases, an entrepreneur won’t ask for enough, causing them to be unable to run the business. On the other hand, many entrepreneurs request too much money, which ends up sitting in a bank account unused, causing investor pressure. – Jared Weitz, United Capital Source Inc.
The more you rely on private investors, the more you relinquish control of your business. Before seeking capital from private investors, explore all of your financing options. Although lender financing requires repayment, it might be worth it to retain total directional control of your enterprise. You may experience slower growth, but the return is all yours. – Justin Goodbread, WealthSource Partners, LLC