The six major mistakes I usually see startup founders make when approaching investors are:
Asking for a High Valuation
Entrepreneurs invest a lot of money and time in building fancy financial models that produce a net present value based on future cash flows that are often unrealistic and too high.
The valuation of a company is fundamentally based on forecasting future cash flows and the ability of the team to execute on the business plan in the specific conditions within the economy the company operates. Thus it is extremely difficult to evaluate the true value of start-up based on its growth potential. Ideally, investors want to see growth within the first eighteen months of inception.
At the end of the day, your business idea is only worth what investors are willing to pay, so please keep that in mind.
Failing to have a Communication Strategy
Entrepreneurs that do not have a specific communication strategy in regard with their interactions with potential investors are prone to failure.
First of all you need to do your research on investors. It’s pretty easy to find out what sectors investors are interested in, what cities/countries they invest in, how much money they invest, who they’re friends with. Once you have that info, it’s much easier to target your pitch at the right people or try and get the right introductions to the right people.
And then you need to build an on-going relationship and rapport with the specific investors that you want to have in your company’s Board. By presenting every piece of communication from the investor’s perspective whether it is a pitch deck, an email, or an executive summary.
Unsubstantiated Commercial Data
The number of start-ups that have less experience and sophistication than those companies entering the public market is huge however that does not mean that you shouldn’t have the same quality and tested validity of your commercial data and thus increased investor confidence in what you do and say.
Entrepreneurs time and time again make the mistake of mismanaging their own company data and documentation, which could lead to losing a possible deal.
Once investors have your binding or non-binding term sheet, they will want additional documentation such as: intellectual property protection, employee data, or non-disclosure agreements, failing to produce them in an orderly and timely manner is a potential deal breaker.
Inability to Source a Lead Investor
Entering into a market with zero momentum on your equity fundraiser and without a lead investor, significantly increases the possibility of failure. Having access to an extensive network of investors is critical, as is a founder’s ability to source a lead investor who trusts him/her, knows the company and the industry vertical.
Limited Social Capital
Think about how likely it is that an investor who has never met you before, listens to your pitch then feels immediate confidence and trust in you before writing you a check for anywhere between €250K to €1M. It doesn’t happen that way.
There are multiple ways to establish relationships with investors, start by attending networking events, connecting via Linked In, ask business associates for introductions or find a suitable mentor. Investing in start-ups is a risky business for investors and the basic idea is for any entrepreneur to take the necessary steps to de-risk his pitch to these investors.
Want to learn more on how-to-do, drop us an email and we will be happy to share our knowledge and insights with you!
Christos Lytras – Managing Partner