Most common mistakes when raising money and how to avoid them
Former First Lady of the USA, Eleanor Roosevelt, said: "Learn from the mistakes of others. You can't live long enough to make them all yourself." The fundraising journey is challenging and there will be a lot of things on your to-do list. In order to make things easier for you, we pulled together the most common mistakes that other entrepreneurs make while raising money so you can watch out and make sure to not fall into the same traps.
Don't ever ask a VC to sign an NDA
VCs won't and can't sign NDAs (non-disclosure agreements) and you shouldn't worry about it. It doesn't make sense to ask for it as:it signals naivety on your part,VCs cannot sign NDAs for practical and legal reasons,NDAs don't really hold up in court.
VCs look at thousands of pitch decks and companies, and there is a chance that an entrepreneur's idea isn't as original as they think. Some NDAs might even limit the VC from listening to pitches from companies in the same category. Pitch decks are easily shared, which can work to your advantage, given that investors may share with other partners or people in the investment community who your company might work well with.
Rather than using an NDA to stifle the excitement an investor may have, use a deck sharing platform that allows you to see who's been viewing your presentation. If sharing starts to become suspicious, you have the ability to revoke access.
Don't bombard investors with cold emails
Cold emails are simply not as effective as warm introductions as they don't give much credibility. Try to find someone who is connected to them and can introduce you. If you don't have an extensive network yet, start building it for example by joining (virtual) events where you can meet potential VCs or online networks that have a bigger reach than you.
If the VC declines the meeting, "no usually means no". But as time passes, you may make progress, and then it makes sense to go back to that investor - but more likely for a future round. "Let me try to convince you why you're wrong for saying no" is not an effective way to engage with an investor.
Don't communicate a range
Don't tell your potential investor that you are raising an amount somewhere between 500K and 1M USD. An investor will choose the number that is in their best interest, not yours. Instead, figure out what that number is and use that specific number in the fundraising process. Read how to find the optimal (instead of not the highest) valuation in our previous article here.
Don't hand the negotiations over to your lawyer
Keep direct communication lines between you and the investor open, even after signing the term sheet and as you go through discussions on the agreements, don't hand it over to your lawyers. Do keep your lawyers in the loop, however; but make sure that you have full ownership of the process.
Other things that you should not be doing while dealing with investorsBe dishonestBe arrogant or unfriendlyBe aggressiveSeem indecisive - although it is okay to say you don't know yetTalk so much that investors cannot get a word inBe slow to follow-up or close a dealBreak an agreement, verbal or writtenCreate detailed financial projections (but do work on your unit economics and growth plan)Use ridiculous market size numbers without clear justificationClaim you know something that you don't or be afraid to say you don't knowGet caught up in unimportant details - don't let the meeting get away from youTry to play investors off each other when you are not a fundraising ninjaOver-optimize your valuation or worry too much about dilutionTake a "no" personally
The list of "DON'Ts" may seem long, and it's okay if you make a mistake or two. Always remember to be honest, treat your potential investors with respect, and do your homework. This way, you will significantly decrease the risk of a failure in your fundraising journey.
This article is a part of the "Startup fundraising 101" series. Read also:
Article 1 - Fundraising: what to expect in the journey? Stages of startup funding
Article 2 - Fundraising: why raise seed money, when to raise money, and how much to raise?
Article 3 - Fundraising: how to set your valuation and which financing options to choose
Article 4 - Fundraising: types of investors when raising money for your startup
Article 5 - Fundraising: how to successfully fundraise from pre-seed to seed round