In business, it takes money to make money. You might have a great idea or product, like hosting a fundraiser event, but if you don’t have the funding to pursue it or it’s not something that can be bootstrapped easily, you are going to need to raise funds, either from a traditional lending institution or from an investor.
Raising capital is not easy. In fact, the majority of startups never see a dime of investor money. They typically have to go the friends and family route, they deplete personal savings, rack up credit card debt, or secure a small business loan. No matter what direction you go, make sure you avoid these major mistakes when raising capital to launch.
- Giving away all of your equity in round number one.
Very few investors are going to even entertain an offer unless there is a significant amount of equity on the table, and rightfully so. After all, it’s their money at risk. But, if you give up too much during the first round you are putting yourself and your company in a bad position.
You see, the majority of startups end up having to get a second, third, even fourth round of funding, to keep going. Every time they do this, another piece of the company disappears. You never know what types of situations will come at you, so always be prepared to have to secure more funding down the road.
If you dilute yourself too soon, you face being left with a very small piece of the company, if anything at all. Imagine working so hard to have nothing at the end.
- Taking on piles of personal credit card debt.
You always want to keep your business and personal finances as separate as possible. A lot of entrepreneurs put everything on personal credit cards for two reasons. One, their credit isn’t strong enough to support a large business loan, and two, the business isn’t established enough to qualify for traditional funding.
If the company goes under you are left holding the financial bag and are now personally responsible for paying all of the debt back, with no business to show for it. This can have a major negative impact on your personal finances and put you in a bad spot, making it hard to qualify for car loans and home loans in the future.
Nobody is going to start a business thinking it will fail, but when it comes to your personal finances, you should protect them. There are a lot of unforeseen circumstances that can contribute to the failure of a business, and they are often out of your hands. It’s better to be overly cautious than careless, financially.
- Failing to have a firm grasp on your cash flow needs.
Cash is king. And not knowing your cash flow requirements can lead to an early death for a business. If you are going to be pitching investors, you need to know your numbers inside and out.
You need to know how every dollar of theirs will be spent and what needs to come in every month to support your burn rate. Not only is poor cash flow management a bad look from an investor’s standpoint, but it can quickly kill your business. Something as simple as not having your receivables in on time, causing you to become delinquent on your obligations can ruin you in a matter of 30 days.
Put together a cash flow chart that you can always reference and modify will help you stay ahead of the curve and always know where the company’s incoming and outgoing money is at all times.
- Not knowing how much money you need to start and launch successfully.
Don’t ask for a small amount of financing because you think the bank or an investor will be more likely to say yes. This is the wrong approach, because not having enough money will leave you high and dry.
Most investors and banks are savvy enough to be able to see when enough funds aren’t being requested and will deny the application based on their interpretation of a founder that isn’t ready to launch, but in the event that you do secure at a lower ask, it will eventually catch up to you when the funds run dry.