01 Sep Top 6 Mistakes Entrepreneurs Make with Investors
Are you pitching investors for the first time? If so, you are probably excited about your first funding round and telling investors about your idea for the first time. However, raising your first funding round may be harder than you are expecting. On average only 6% of investors you pitch to will be willing to investment (17% with Five23’s business reports). A lot of ground work is required in the startup ecosystem when it comes to making successful pitches. You need to present your company in a clear and precise way. Here are the top 6 mistakes entrepreneurs make when pitching investors for the first time.
1. Lack of Preparation
Perhaps the number one mistake that new startup entrepreneurs make is the lack of preparation itself. A “One size fits all” approach to you startup is a disaster. Just like clients, each investor is different. Study the fund’s background, understand their investment thesis, gauge their mindset, and know why you want an investment from them (outside of capital, what else can they provide you?). Many startup founders are completely unprepared when entering the board room. Business plans are not required in the pitch meeting (in most cases), however, you need to be able to answer questions about the business plan. Practicing your pitch with each type of investor will help you in the long run and give you ample opportunity to perfect your pitch. Giving you the preparedness you need to nail the meeting and close the investment.
2. Unrealistic Expectations
The majority of entrepreneurs set the bar too high with unreasonably high expectations. They think an investment will change their life and make the startup instantly successful. In reality, this is almost never the case. Founders must set reasonable expectations of growth, revenue, profitability, and financials; backed by strong market research. Even if your product or service may be unique, build a logical approach to why your assumptions are valid. This will help to set your own expectations at a reasonable level. Furthermore, it can give you a clear mindset when approaching expectations with investors.
3. The Drama of Fundraising
Being an entrepreneur is definitely an exciting journey. However, the majority of founders lose their focus when they get excited about the fund raising process. The ultimate goal of fundraising is to obtain enough money to be able to fund the stage of your process. This could be product development, client outreach, human capital, etc. Entrepreneurs need to keep this in mind rather than just closing an investor. The majority of investors will see this, and may lose interest.
4. Value Proposition
While many startups are built on a unique idea, some of them are a “copy-paste” of an existing idea. Many founders are inclined to thing their “copy-paste” idea will be funded, because several similar startups have been funded. The problem with this approach is the lack of a clear value proposition. Questions entrepreneurs can ask themselves; Why is your startup different? How is it unique from the rest of your competition? Are you offering the same product / service in a niche segment as others? Are you offering the same product or service? Has the market seen your product / service before? Having a clear value proposition, product positioning, and product differentiation increase your chance of receiving funding.
5. Lack of a Clear Strategy
The success mantra for a startup is having the right product, the right team, a clear product need, and a solid action plan. Many startups fail in these items due to a clear action plan. Missing a clear action plan leads to confusion, higher capital burns, and a higher chance of startup failure. All startups should have a plan of a set of dynamically changing milestones across all time frames (short, medium, long).
6. Justifiable Valuation
If you walk into an investor meeting seeking, $1.5mm at a valuation of $15mm (10% of the company), you have to be able to justify it. The vast majority of startups cannot, they say they need ‘x’ amount of money to obtain ‘y’. This model is backwards. Entrepreneurs first need to determine their value then they can properly decide how much money to raise. With this model, startups need to discover what they can do with the money they are able to raise. This gives more confidence to investors when they are analyzing your company for investment. They know what you are going to do with the money and are able to justify your value.
Understand the value of your company may be difficult, and many mistakes can be made along the way. Five23 helps entrepreneurs and startups overcome these six items and determine the value of your company. By being an unbiased third party, we can determine value and analyze without prejudice. To learn more about what we offer startups, please follow the link here or contact us via email: contact@five23.io.