Entrepreneur: Many financing efforts fail because of avoidable mistakes that are made in pitching potential lenders, structuring the agreement or managing the money once the deal is done.
Steering clear of these missteps can increase your chances of success, both in obtaining startup funds and keeping the money flowing. Be sure to avoid these blunders:
Half-baked business plans
There’s nothing worse than going into a money meeting unprepared. If you haven’t put the time and energy into writing a full-blown business plan complete with elements, such as a cogent business description, financial projections and a competitive market analysis, the people with the cash won’t put the time into evaluating your proposal.
Focusing too much on the idea and too little on the management
It’s not enough to convince potential backers that you’ve invented the next must-have gadget or can’t-miss clothing store concept. You also need a team that can generate the revenues to repay a bank loan or provide an exit strategy for a VC or angel investor. Many business novices ignore the second part of the equation; that can doom their money quest. Showing that you have recruited a top-notch salesperson, a skilled marketer, an accountant with startup experience, other key personnel, and even outside experts like an attorney or business coach who can supply professional guidance is essential to finding a funding source.
Not asking for enough money
In a 2004 U.S. Bank study of reasons for small business failures, 79 percent cited “starting out with too little money” as one of the causes of their collapse. That’s often because entrepreneurs who are wet behind the ears don’t realize that they should calculate their borrowing needs based on their worst-case scenario instead of their best-case forecast. If you’re underfunded, you won’t have a cushion to tide you over in the event of slow initial sales or unexpected market conditions.
Having too many lenders or investors
One of the hazards of securing financing from multiple sources is managing too many relationships and expectations. It takes time away from your core business. These not-so-silent partners may have conflicting interests or demands and the consequences can be devastating. This is particularly true when you raise money from friends and family.
Failing to get the proper legal agreements
This is arguably more important than a prenuptial agreement for a couple with significant individual assets. Every lender or investor eventually will need his money back, and a legal document covering everything from the terms to the timing can avoid the kind of acrimony just described.
Poor cash flow management
Too many new business owners burn through their seed money too quickly and fail to reach cash flow-positive status in a timely manner. Some causal factors, such as late product deliveries and economic downturns may be beyond one’s control, but the executive team is clearly at fault for others, such as unnecessary spending and overly optimistic expense/income forecasts. Financial sponsors don’t take kindly to that sort of mismanagement. And if they turn off the tap, all of your hard work may go down the drain.
The 6 Biggest Mistakes in Raising Startup Capital [Entrepreneur]
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