The Two Biggest Mistakes Founders Make While Trying to Raise Venture Capital
Cofounder & CEO of Humble Dot
First-time founders reach out to me via Twitter for general fundraising advice or for deck review, and over time I noticed a common pattern amongst those who have trouble raising money. The two biggest mistakes appear to be rooted in poor assumptions about raising venture funding in the first place:
- Any business is suitable for venture funding if there's early traction.
- The founder’s background is less relevant if there's early traction.
These assumptions will doom the founders from the beginning. Avoid them if you can, so check yourself before you wreck yourself.
Not Every Business Is Fit for Venture Funding
A mismatch in risk exists between founders and venture capitalists. A founder, especially a first-time founder, will be incredibly risk-averse and will do whatever it takes to keep their company alive. It is their baby—a reflection of their personal success or failure; their reputation materialized into one entity. Investors on the other hand, want to make several risky bets due to the economics of running a fund. They want founders to spend the money to either succeed or fail quickly. All they need is one startup to be mega-successful, but they need every startup they invest in to have the potential to be mega-successful.
Potential is usually conveyed through a vision and supported by a Total Addressable Market (TAM). Typically, TAM is some rough estimate you pull out of a hat and back up with napkin arithmetic. However, it is useful to help investors understand the potential upside to your startup. I think founders with early traction tend to overestimate the importance of their traction and underestimate the importance of their vision and TAM.
I saw startups with close to $600k in recurring annual revenue fail to raise a seed round because they were unable to convey how their initial $600k could turn into billions. Many startups never will have that potential—founders fail to determine if their startup is fundamentally a niche company that should be bootstrapped versus one that fits profile of a venture-funded rocket ship. If their startup is the former, they're set up to fail at fundraising even before they start.
Founder Background Is Still Incredibly Important
Founders put too much emphasis on their startup and not enough on how their backgrounds connect themselves to it. The most convincing pitches are ones where founders have some type of product or market insight, and they organically arrived at their business in terms of timing and experience.
Countless times, founders choose to work on a startup idea without any experience in the field and wonder why investors won't back them. Given the choice between two startups, one by a founder with relevant experience, and one without, I guarantee the founder with experience will always win out and will naturally have a better pitch. It's also difficult for a founder to be passionate about a space they have no significant operating experience in. Granted, there are a few instances where a lack of experience results in a creative disruption of an industry. This is very rare though.
It's always tough for founders to evaluate as to whether or not they have founder-startup fit, but it is necessary. It takes a lot of self-awareness to objectively look at the situation and say "no, the timing is not right for me yet." I'd argue that most founders just want to be founders initially for selfish reasons and are drastically underprepared to carry out their vision—but this doesn't mean they never will be.
Be Honest With Yourself
You'll be doing yourself and your business a huge disservice if you pursue venture funding if your business isn't suitable in the first place. Additionally, know when it is the right time for you to start your own business. You will be wasting time and probably lots of personal money. Instead, think about where your knowledge gaps exist and how to improve them. Work in fast growing companies to maximize how much you learn on a daily basis. Understand where business opportunities exist in these fast growing companies. Eventually, your knowledge will organically materialize into a business idea that makes sense and that you’ll be prepared for. Don't try to force yourself to become a successful founder, let it happen naturally.
Previously published at https://wrgoto.com/the-two-biggest-mistakes-founders-make-while-trying-to-raise-venture-capital
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