Growthink Blog

Top Seven Capital-Raising Mistakes

Print
Categories:

In my experience of working with many managers and entrepreneurs that have had great success in raising capital for their businesses, as well as our experience of working with as many that have struggled, here are some of the key mistakes I see most typically made:

#1. Vastly underestimate time commitment necessary for fund-raising. Companies vastly underestimate the time commitment necessary to successfully complete a financing. We recommend that a company seeking financing budget between 500 and 1,000 work-hours to the capital-raising process, spread out over a 6 month time period. The key processes include:

  • Perfecting the business plan, offering memorandum, and other company due diligence materials;

  • Developing a comprehensive, targeted prospective investor list;

  • Contacting this list and responding to investor due diligence requests; and,

  • Negotiating the transaction.

 

To see how easily the time adds up, our experience is that only about 25% of prospective investors showing an initial interest in a transaction actually progress to detailed company due diligence. Only about 10% of this 25% actually progress to a bona fide offer of funds, of which only 25% of these actually result in an investment transaction. So completing a financing transaction requires, on average, contacting approximately 160 pre-qualified prospective investors.

#2. Poor Presentation Skills. Far too often, investment discussions go astray because of poor oral presentation skills on the part of Company management. Active investors across the risk spectrum (startup equity to secured debt) are literally inundated with investment opportunities. It is not unusual for a principal at a high profile venture capital firm to review dozens of prospective investments every month. As such, it is imperative that your investment presentation be extraordinarily brisk, to the point, and delivered with flair and great enthusiasm. If the key presenters on a management team do not have these skills, then our recommendation is to either invest immediately in professional presentation and public speaking coaching, or to replace company principals with more impressive presenters. It is that important.


#3. Non-Detailed Use of Funds Statements. We have spoken with countless companies that get stuck on the simple question, "How much money are you seeking and why?" Our experience is that the most credible and impressive operating executives present sober and credible use of funds forecasts based on multiple funding scenarios. These forecasts are built from "the bottom-up," with specific revenue and costs estimates garnered from the company's historical financials and from forward-looking surveying of vendors, salary bands, property leases, etc.

 

#4. Poor Understanding of Cash Flow. Most operating executives have a relatively strong grasp of the marketing and operational components of their business, but tend to be weak in projecting and communicating the specifics of how they actually make money. And by making money we mean creating cash. Before an investor will place cash into a company, they must be convinced that this cash will be transformed into a company infrastructure that will eventually (and sooner rather than later) create much more cash than originally invested. Creating cash requires a rock-solid revenue and cost flow business model. Among others, key variables in the model include customer acquisition costs, pricing and gross margins, accounts receivables aging, realistic administrative costs, and taxation and depreciation. The better that a company understands and communicates these cash flow variables, the stronger and more credible will be the investment offering.

#5. Targeting the Wrong Investor Audience. We have seen countless companies waste precious time and money contacting unqualified and inappropriate prospective investors. Before an investment offering is undertaken, a comprehensive prospective investor list must be created, and all of the investors on that must be qualified as to track record of investing in financing stages (private, public, equity, subordinated debt, senior debt, etc.) and market sectors similar to the company in question. While there are always exceptions, contacting prospective investors that have not recently invested in a company "like yours" is, in our experience, almost invariably a losing proposition.

#6. Accepting Too Much Feedback. Capital-raising is a long and arduous process. As discussed in bullet #1, the vast majority of investment presentations made will result in some form of rejection. But in addition to rejection, the company will also receive - either solicited or unsolicited - advice and feedback on the "flaws" of their business.
While this feedback is sometimes valuable, it is critical to very carefully filter and evaluate this feedback before revising the business plan and presentation. By the time an investment offering is circulated, company management should be extraordinarily convinced and committed as to the validity and solidity of its plan. Be sure to measure all feedback, no matter how well-intentioned, against this conviction and commitment.


#7. Going It Alone. Raising money is one of the most, if not the most, challenging undertaking an organization will ever make. The pitfalls and hazards are everywhere, and the consequences of failure are devastating. Capital is the fuel that drives business. And without fuel, your venture will sputter along, then stop, and most likely be eventually abandoned.
With the consequences of failure so dire and the challenge so great, it only makes sense to seek out the absolute best professional assistance to maximize the probability of financing success. A quality investment banker, specifically skilled in equity and debt placements, is one of the most important advisory relationships a company can establish. While law and accounting relationships are extraordinarily valuable, they are, in essence, cost centers for a business. A quality investment banking firm, in contrast, is the ultimate revenue center -- vastly increasing the likelihood of financing success and taking the vast majority of its compensation on a contingent basis. The key, of course, is to find an investment banker of true quality. Unfortunately, there are a lot of unscrupulous individuals and firms offering capital-raising advisory assistance. Our recommendation is to always check references and also make sure that the individual or firm is properly licensed with the NASD and the SEC. A transaction participated in by an unlicensed firm can subject all individuals and firms party to the transaction to significant fines and sanctions.

 

 

 

---

About Growthink

Founded in 1999, Growthink is a leading business plan consulting firm and middle market investment bank.  Our professional business plan writers and investment bankers have assisted more than 1,500 clients in launching and growing their businesses, and raising more than $1 billion in growth financing.

 

Seeking professional assistance with your business plan? 

 

Raising a private placement round?

 


Share this article:


Larry Holmes says

I can see immediately, just from this one page of information, that you know what you are talking about. Because of past experience, and because I am so broke I could not pay anyone for anything, I had decided I was going to have to "go it alone", because I had no other choice. Perhaps not; based on this article, I will be contacting you when appropriate. I know that I have created many of the requirements for a successful company, but without the necessary resources for capital needs (immediate and future), those resources are like an expensive, marvelous sports car stored in a garage for lack of fuel. The only good it can do is to give its owner a thrill to look at it and daydream! So far, that is all I can do with my "company". I hope that will change. Thanks for this helpful information and for taking time to spell these things out honestly and up-front. I am sure it helps you but it should also help those who may contact you, to make sure they don't "lose out" by being so far away from necessary preparations that you cannot help them without massive effort (and costs). best regards, Larry Holmes
Posted at 3:39 am
George says

I truly thank you for this article. As Mr. Holmes mentioned, the article does demonstrate the level of knowledge and wisdom that you possess. Currently, from our perspective, our company is still in early Beta with many of our features still under development or purposely excluded from mainstream use until we feel the time is appropriate. As we continue to improve our offerings, we will simultaneously dedicate much research time into the aforementioned venture capital funding options available. Based on our early trials, we do see that the main obstacle that we will have to overcome is mostly on our marketing end as our current customers keep expressing satisfaction with our services. In the end, it boils down to available funding and having the right people backing the project. Once again, thank you for your insight. Sincerely, George
Posted at 3:58 pm
john dege dabele says

This is the most helfull sitite for those of us in the undeveloped nations where education pertaining to business developemnt does not exist.
Posted at 9:51 pm
Sheila Frazier says

I enjoy getting your newsletter and all the informative articles you offer. You did a great job on our Business Plan. We can only blossom further in the near future. Thanks again. Sheila Frazier President Eaglesnest Secretarial Service, Inc.
Posted at 4:12 pm
AJS says

Well done.
Posted at 7:53 pm
PJS says

Having completed approximately $3.5 billion in financing and M&A transactions over the past 20 some years primarily for venture-backed companies, my experience has been that VCs rarely look favorably on having a broker of any sort involved with a fund raise. They look askance at seeing their investment dollars go to an intermediary. Private equity and hedge funds, that's different.
Posted at 4:08 pm
John Hunter says

Hi, I'm once again looking toward you folks for help. I was at one point going to build a shooting range, but I talked to a number of people and found out that it could be a very great problem. So, I decided to go with my first love; Photography. I know I can make it last. I know what I need to do to make it a positive venture. I love photography. I have been at it for 48 years. I've taught basic photography twice in my time. Once in upstate NY, and again at the DOM at White City, Oregon. I do still have the one problem. Money. I am trying to come up with the cash through a company that deals in membership. It's the Woodbridge Club. They are located in two places. New York and Florida. The club is part of Lombardi Publishing. If I can't get the funds I need this way, I will be back to see you folks. Later aye. Best Regards, John Hunter, [email protected]
Posted at 1:06 am
Growthink says

PJS - thank you for your comment. To clarify, Growthink is not simply a broker. The services a client receives from us are far more comprehensive from the services brokers usually offer. We help companies grow, and sometimes that involves raising capital on behalf of our clients, but it is always part of a larger growth strategy which companies engage us to help devise and implement with them in a partnership capacity.

Also, as a firm, we have never heard this objection from a prospective investor. A VC or prospective investor would much rather see an entrepreneur/company management spending their time to build the company and help it grow to hit important metrics and milestones than burning their time reaching out to prospective investors on behalf of their company.

That’s where Growthink comes in. We do the heavy lifting so entrepreneurs are free to do what they do best – execute on their companies’ growth – and we do what we do best: get traction on notable deals among decision makers at appropriate investment firms.
Posted at 8:55 am
betty gilbert says

I am thankful for this information because I don't know how to do this on my own.this is the most help I have ever received from a website. Thanks again
Posted at 9:09 pm
Michael N. Brette,J.D. says

Raising capital is a profession and should only be conducted with the assistance of some one who has spent years developing relationships with accredited investors. Investors do not place their capital with strangers or business plans posted on websites. Real investors put their capital into deals that have been referred to them by their trusted advisors ( attorney, CPA or financial consultant). This way they know the deal has had complete Due Diligence and the proper investigation and examination of the people involved. VC firms receive 2,000 deals per year. They look at 10 and fund 2. The 2 they fund are usually referred to them by an attorney, CPA or other financial professional they have worked with in the past. Successful funding is based on strong relationships built over time and getting the proper introductions.
Posted at 6:00 pm
private placement memorandum says

I recently came accross your article and have been reading along. I thought I would leave my first comment. I have enjoyed alot. I will keep visiting this blog very often.Its a really very impressive article.
Posted at 5:11 am
Adam Hoeksema says

I recently wrote an article on my ExecutivePlan Blog titled, "The 5 Most Devastating Funding Mistakes that Most Entrepreneurs Make." For most entrepreneurs these days, funding is nearly impossible to come by. According to the report titled, “Important Things for Entrepreneurs to Know about Angel Investors” which is distributed by the Angel Capital Education Foundation, only 1 to 4% of angel investment applicants successfully raise angel investment capital. So before you ruin your chance at securing investors, please make sure you have not committed any of the following deadly mistakes. 1. Wait Until you Need It - So many entrepreneurs make the mistake of waiting until they need the capital “tomorrow” to begin the process of seeking funding. Make no mistake about it, the process of raising capital can take months and months. Even a simple loan will require enough paperwork to kill a small tree. Ironically bankers and investors are more likely to provide you with additional capital when you don’t need it! So don’t wait until you have an immediate need to begin the funding process. 2. Submit a Full Business Plan - Another great way to get your funding application thrown in the trash is to submit an unsolicited, full business plan. An investor or banker is not going to waste 2 hours to read through an entire business plan with your initial funding request. Submit a short executive summary, then if you are asked to submit a full business plan - great! Just don’t start with your business plan. 3. Claim “Conservative” Projections - It can be a major turn off to some investors and bankers when you call your financial projections “conservative.” Of course you think your projections are conservative, but the fact of the matter is that many, if not most, businesses fail within a few years of launch. If every entrepreneur’s projections were truly conservative, then why are so many small businesses unsuccessful at reaching their projections? Don’t let yourself sound ignorant. Simply state your projections and let the bankers or investors make their own judgment. 4. No Next Step - Maybe you get a chance to submit an executive summary to a potential investor or even recite an elevator pitch to an interested banker. This is a golden opportunity that can be worthless if you fail to outline a clear next step. For instance, in your executive summary you should request a meeting or a phone call as a clear next step. If you simply end your elevator pitch without a clear next step, your audience will quickly forget your funding needs. 5. No Follow Up - Don’t just assume that a potential investor will follow up with you if they are interested. They may want to gauge your commitment by waiting for you to follow up. Give the investor a couple of days to review your executive summary, but make sure to follow up before you fall of their radar screen. Keep these potential deal breakers in the forefront of your mind as you begin the funding process for your small business.
Posted at 6:29 pm
moncler jackets says

I lately arrived accross your write-up and are actually studying along. I believed I would leave my earliest comment. I have enjoyed alot. I will retain going to this weblog extremely often.Its a genuinely extremely amazing article.
Posted at 8:22 pm
Samantha says

A lot of people commit such type of mistakes and I didn't even know about them before I read your information. It was an eye opener. Thanks a lot for bringing this up. James @ Calgary Realtor
Posted at 2:33 pm
Kim says

You have been able to bring a lot of good insight into this. I know people who have made such mistakes. I'm not going to do this for sure. Kim @ herniated disc treatments
Posted at 4:18 pm
Samantha says

I know that a lot of business owners make such type of mistakes in their ventures. I'm sure a lot of people have found this post useful. - hemorrojder
Posted at 6:40 am
Samantha says

I understand that making mistakes is sometimes part of a plan but we should learn from our mistakes and that is more important- Cat Behavior Tips
Posted at 6:12 am
jenny says

Mistakes are something you should always stay away from if you want your business to succeed - fastighetsmäklare
Posted at 12:42 pm
Amanda says

For sure this is very interesting because I have seen people commit such mistakes - nikon d3100 review
Posted at 8:05 am
Phillipa says

You are absolutely right in saying that because I've seen this happen so much - diatomaceous earth food grade
Posted at 8:29 pm
Eva says

Doing such mistakes will cost you a lot in the long run. It is important that people take care of such things before getting on board - video clips online
Posted at 5:19 am
Sami says

That's a good one! I like reading articles on Business and related topics. Have you considered affiliate marketing? I talk about this in My Blog which surely would help a lot of people.
Posted at 6:41 am

Most Popular
New Videos

"Business Plan
SHORT-CUT"

If you want to raise capital, then you need a professional business plan. This video shows you how to finish your business plan in 1 day.

CLICK HERE
to watch the video.

"The TRUTH About
Venture Capital"

Most entrepreneurs fail to raise venture capital because they make a really BIG mistake when approaching investors. And on the other hand, the entrepreneurs who get funding all have one thing in common. What makes the difference?

CLICK HERE
to watch the video.

"Brand NEW
Money Source?"

The Internet has created great opportunities for entrepreneurs. Most recently, a new online funding phenomenon allows you to quickly raise money to start your business.

CLICK HERE
to watch the video.

"Old-School Leadership
is DEAD"

"Barking orders" and other forms of intimidating followers to get things done just doesn't work any more. So how do you lead your company to success in the 21st century?

CLICK HERE
to watch the video.

Blog Authors

Jay Turo

Dave Lavinsky