5 Mistakes To Avoid When Funding Your Startup

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By guest writer John Bell

There is a host of startups coming into existence relentlessly and that is generating high-voltage competition. Startups are coming up with great business ideas that are vying for attention and are looking for funding. Consequently, venture capitalists are flooded with excellent ideas but they have limited resources to invest. As an entrepreneur, coming up with a product or service that helps you stand out is just the initial step to attract investors. You also have to consider several other issues when asking for funding for your startup. This article summarizes 5 key mistakes to avoid.

1. Giving Up Excessive Equity

If you give up excessive equity right at the start, you may lose control over your business and limit your possibilities of raising more money in the future. If you end up being a minority shareholder in your own company, it will be hard for you to execute key business decisions. Therefore, unless the investors bring in significant knowledge, value and growth that you cannot access on your own, avoid giving more than 49% of your company’s equity. Instead, think of alternative ways to secure funding such as loans from friends and family or crowdfunding.

2. Building An Unrealistic Business Plan

A good business plan will help investors and business partners really understand the direction where you want to take the company. It will help you describe the specificity of the product or service you are developing and reflect on your value proposition in an overcrowded market. The business plan also contains a financial plan that will help you project the revenues and expenses your business will be incurring. This step is fundamental because if you come up with inflated assumptions on market penetration, sales and growth rate or you underestimate your operating and administrative expenses, you will lose credibility and your chances of getting funding.

3. Allocating resources inefficiently

When asking for funding, it is crucial to explain how the money will be used. Before investing in your company, people will want to know how much you will be spending, on what you will be spending the money, as well as where and when. Therefore you need to show a solid understanding of how much will be required at different stages of your business. Resource allocation also includes people and capital. In other words, you need to understand and explain what type of skills will be required to grow the business. Capital allocation is also important, if your business requires property, plant or equipment to operate. For example, if you pour millions of dollars at the early stage of your venture to hire business executives, to buy inventory or to acquire expensive machinery, you have to ensure these investments will yield the expected returns; otherwise you will lose investors’ trust.

4. Not Coming Up with a Unique Product

Your product or service may be amazing but you may not succeed in getting funding if it fails to be unique or to add value to the existing market. For example, if you are developing a product that is already being sold, you have to improve the existing offer by including innovative and creative touches to it. You are more likely to secure funding if you convince investors that your product is solving a problem that has not been addressed yet, or that has been addressed poorly by previous designers.

5. Not Having a Compelling Story

It is often said that investors don’t invest in ideas, but they invest in people. In fact, we should not underestimate the role of emotions in effectively convincing investors to fund a startup. Beyond financials, you must tell a gripping story to show venture capitalists how passionate and committed you are with your business. Therefore when pitching for funding, also talk about your aspirations, your dreams and your inspirations. This will help investors relate to you and want to invest in you.

 

Author Bio: John Bell is an experienced and skilled business consultant and Financial Adviser. He helps clients both personal and professional in long-term wealth building plans. During his spare time, he loves to write on business, finance, marketing and social media. He loves to share his knowledge and experts tips with his readers.

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