If you're raising business finance, it's undoubtedly taking a good deal of time and effort - so you want to be sure you're doing the right thing. Crowdfunding specialist John Auckland of TribeFirst tells us what he's learned - and what mistakes to avoid
There's nothing worse than spending precious time on fundraising activities that are at best ineffective. At worst, your actions might actually be putting investors off the idea of funding your business.
Here are seven common mistakes I see entrepreneurs make when looking to raise money.
1. Being unclear with your message
I run accelerators for Virgin Start Up and crowdfunding bootcamps with Grant Thornton, and on both of these programmes I spend around 70% of my time showing entrepreneurs how to refine their message using fewer, better, clearer words.
Often, I've seen companies attempt to raise funds using their advert or product video as a tool to engage investors. Not a good idea.
Yes, your should show investors your product - but more importantly, sell them your vision, show the market potential - reveal what they can potentially earn from joining you on your journey. If you have a choice between clarity and creativity, opt for the former every time.
2. Not surrounding yourself with the right people
Often, entrepreneurs are passionate over-achievers who long to disrupt their industry. So they tend to overestimate their own abilities, and underestimate how much an investor needs reassurance that the team is reliable.
For an investor, the most attractive team is one that's disruptive in their thinking while having solid industry experience.
You don't need to have personally spent half your life working on your trade - it's actually very easy to get experienced board advisors, who only need to attend an annual AGM and be available for the odd phone call.
As a bonus, their advice will stop you making critical business mistakes, all for a relatively small retainer or a bit of equity.
3. Not knowing your numbers
How did you arrive at your valuation? What's your run rate? What's your burn rate? When do you break even? What's your year 1-3 forecasted EBITDA (earnings before interest, tax, depreciation and amortisation)?
These are all perfectly valid questions from an investor, and it's surprising how few entrepreneurs can answer them.
If all of this sounds like gobbledygook to you, research some key phrases on Investopedia before you start to speak with investors. Better yet, look on the forums of crowdfunding platforms such as Crowdcube and Seedrs to see what questions commonly pop up.
If you aren't naturally numerate, learn the key highlights of your financials from memory.
4. Being unrealistic with your forecasts
Another major mistake is presenting wildly unrealistic forecasts. You're an early stage start-up, or a young company about to see major growth, so no one is expecting you to be accurate. But an investor will want to see that you have your feet on the ground.
Your numbers should tell a story - showing spikes in sales when a new revenue stream is initiated or a new salesperson employed, for example. They should show growth in line with market trends, and comparisons to competitors. Your forecasts are designed to reveal your workings, and demonstrate your grasp of your industry.
If your business model suggests wild, over-optimistic growth, then you will quickly turn an investor off. It's doubtful that Facebook's early forecasts ever predicted its meteoric rise.
Of course every investor is searching for that investment opportunity with unicorn potential (a 'unicorn' being that magically rare company that achieves a $1bn+ valuation within its first decade of trading). But present them with the facts, and let them be the judge of your potential.
5. Valuing your business too high - or too low
Pitching the wrong valuation is one of the things founders worry about most when they first start working with us. What most people don't know is that it's actually very easy to avoid going in too high or too low. It starts with putting together a realistic set of forecasts (see point 4).
Having worked with 50+ start-up or growth companies, and from speaking with hundreds of investors, I believe there are three central pillars to a sound valuation:
- Being in the right band - most investors are looking at the amount of equity on offer in the round. You should ideally be offering between 10-25% per round. If it's outside these parameters, questions will likely be asked.
- Comparison to others in your sector - search other companies on Beauhurst or Crunchbase to see what valuation they achieved at a similar stage. Also look at how your industry usually does it - for example, in tech companies are generally valued based on their number of active users, whereas food and beverage companies tend to use an EBITDA multiple.
For really early stage companies, just find out what a competitor successfully raised in their seed round and at what valuation. Then make sure you're in the same ballpark.
- There is a logical argument. Once you've established a point of comparison, use that to show rational reasoning for your valuation. For example, if you're a haircare brand, you can use the example of Unilever buying TIGI for 1.65x their annual revenue. So a logical argument would be something like:
Our projections suggest a turnover of £8.5m in year five. TIGI sold to Unilever on a 1.65x turnover valuation, therefore we would be valued at £14m using the same methodology. So our current valuation of £1.4m would provide you with around 10x ROI.
You can present any argument you like, as long as it involves numbers that are easy to understand, is linked to a strong comparison, and is clear and logical.
6. Being frivolous with your spending
An investor will sometimes pull their investment if they think you're spending your money unwisely. It stands to reason - you're meant to be growth hacking and bootstrapping your way to success, not blowing all your profits before you've earned them.
Entrepreneurs obviously want to impress when promoting their business, so the temptation to spend on an expensive video or hold a flashy event is understandable. Allocating some funds for promotion is sensible - but your investors won't be happy if they feel you're going overboard.
7. Waiting until you REALLY need the money
If you raise funds when you're out of cash, you'll come across as desperate, and may end up being backed into a deal that's stacked in the investor's favour.
Just like with getting credit, if you look for funding when you don't actually need it, you'll end up with better deals. It also takes far longer than you think to get money in, so starting early will make the entire experience far more relaxing!
Written by John Auckland, crowdfunding specialist and founder of TribeFirst