Question: What is the biggest mistake many entrepreneurs make when approaching investors when first starting up?
Misguided Ideas About VCs and Angel Investors
"The truth is, not every business is suitable for VCs or angel investments. It's important to know if your business is the type of entity that is attractive to potential investors. Do your homework. Develop a track record of historical success. Don't expect others to invest in your venture if you haven't."
Thinking It's All About the Idea
"It's not. Investors have one thing in mind; how will your company help make their money back, and ten times? Be thoughtful and give answers crafted in their terms, not yours. Make sure you address the profitably, not just innovativeness, of the idea and how ultimately, the company will generate cash to give back to investors. Unless it's the next Twitter, show them why it's worth it for them."
Take a Walk in the Investor's Shoes
"They fail to realize that there are two sides to the equation. It is easy for new entrepreneurs to let a "brilliant" idea cloud their mind and blow their pitch to investors. Switch gears and put yourself in the investors shoes. As the investor, you want to know about profitably, scalability and how long it will take for your investment to return, plus interest."
Too Many Slides
"Massive slide decks and mind numbing detail are going to bore busy venture capitalists and angel investors. VC Fred Wilson recommends you keep your fundraising deck to six slides. You should be able to articulate your company's vision and passion quickly and simply. Over-complicated businesses rarely succeed, but businesses that solve a fundamental problem and inspire passion certainly do."
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Have a Budget Laid Out
"Investors hate it when they think you can't tell them what you are planning to do with their money. Make it a top priority to lay out a financial forecast that overviews your needs and how their investment money will be allocated over time. "
Not Doing Enough Research
"The process of seeking out and engaging investors is tedious and requires extensive research. Spend the time researching the process and the type of investors that's right for your company before making any moves."
Not Asking for Advice
"Entrepreneurs often forget that they don't have all the answers. When pitching investors they can run through a 20 slide deck, thinking it's flawless and even setting the valuation at the end. If you do this you are diminishing your chances to make a true connection with the investor and establishing them as a resource. Rememberer they are entrepreneurs too and they can help beyond the cash."
"No matter how great an idea, how experienced and prepared you are, never come out and act as if there is a low risk of failure. Any prudent investor knows the risks are high no matter how positive the pitch. By avoiding an ego-based pitch that most passionate people give, at least the investor knows you're not the typical pitcher and they will respect you for it."
Missing Financial Data
"Investors need to know the following: How much money do you want to raise? How will you spend your money? What is your business model? What is your exit strategy? They need to know these things in excruciating detail. If they give you $1 million, then you need to tell them exactly how you will spend it, and how they're going to make at least a 10x return."
Overpromising and Underdelivering
"Over promising and under delivering is the No. 1 mistake an entrepreneur can make when dealing with an investor. I have worn the hat of both investor and entrepreneur many times and know that surprising investors with higher profits is better than the opposite. Be conservative with projections or face losing an investor for life if you under achieve after projecting aggressively."
Not Being Ready for the Money
"Growing a start up is a complicated and difficult task. Sometimes taking money and doing more things faster can make it worse. Make sure you have a great business at its current scale before taking money to scale it up. "
The Young Entrepreneur Council (YEC) is an invite-only nonprofit organization comprised of the world's most promising young entrepreneurs. The YEC promotes entrepreneurship as a solution to unemployment and underemployment and provides entrepreneurs with access to tools, mentorship, and resources that support each stage of their business’s development and growth.