Raising capital can be an important step in the growth of a business.
The right funding can help you expand faster, make acquisitions, invest in new products or enter new markets.
But a poorly prepared fundraising process can take months of management time and still fail to produce the right outcome.
Here are ten common mistakes to avoid when raising capital.
1. Raising capital without a clear reason
Investors will want to know exactly what their money is going to fund.
“We need £2 million to grow” is unlikely to be enough.
Be specific.
If the capital will fund five new locations, explain the cost of opening them and the expected economics of each site.
If it will fund recruitment, explain who you need to hire and what that team should deliver.
Investors should be able to see the connection between the capital they provide and the value you expect it to create.
2. Asking for the wrong amount
Raising too little can leave you needing another fundraise sooner than expected.
Raising significantly more than you need can create unnecessary dilution if you’re raising equity, particularly if the company could be worth considerably more in the future.
Build your funding requirement from the business plan.
Consider what the capital needs to fund, how long it needs to last and what contingency you should include.
There should be a clear rationale behind the number.
3. Approaching investors before you’re ready
A good business can still make a poor first impression.
Before approaching investors, make sure your financial information is accurate, your forecast is credible and you can clearly explain the investment opportunity.
You should understand your key metrics and be prepared for questions about customers, competitors, margins, growth and risk.
You don’t need to know the answer to every possible question.
You should know your own business extremely well.
4. Approaching the wrong investors
An investor having capital doesn’t necessarily make them a suitable investor for your business.
Different investors have different criteria around sector, geography, business stage, investment size and ownership.
A growth equity investor looking to invest £10 million into established companies isn’t relevant if you’re looking to raise £500,000.
Define your target investor before starting outreach.
A smaller number of well-matched investors can be far more valuable than sending your opportunity indiscriminately to hundreds of people.
5. Setting an unrealistic valuation
Founders understandably want to achieve the highest possible valuation.
But an unrealistic valuation can stop a fundraising process before meaningful discussions have started.
Investors need to believe there is sufficient potential return from the price at which they invest.
Valuation should be considered alongside the company’s financial performance, growth, market opportunity, risk and comparable transactions where relevant.
Also remember that headline valuation isn’t the only part of an investment proposal that matters.
The terms attached to the investment can be just as important.
6. Building an unrealistic forecast
A forecast showing rapid growth may look attractive.
A forecast nobody believes isn’t.
If you expect revenue to double, be able to explain what will cause it.
If margins are expected to improve materially, show why.
If opening new locations drives the forecast, demonstrate the economics of existing locations and the assumptions behind new ones.
Investors will often spend more time understanding the assumptions behind your forecast than looking at the final number.
Build a plan you genuinely believe the business can deliver.
7. Hiding the weaknesses
Every business has risks.
Perhaps one customer represents a significant proportion of revenue.
Maybe the founder is still heavily involved in sales.
Perhaps the company needs to strengthen its management team.
Trying to avoid these subjects rarely helps.
Investors may identify them during due diligence anyway.
Understand the weaknesses in the business, explain them clearly and show what you’re doing to manage them.
Credibility matters.
8. Focusing only on the money
If you’re raising equity, you aren’t simply receiving capital.
You’re bringing another shareholder into the business.
Depending on the investment, they may have board representation, voting rights and influence over major decisions.
Think about what you want from an investor beyond the cheque.
Relevant experience, relationships, future funding capacity and strategic support can all be valuable.
Equally important is whether you can work together.
The relationship may last for many years.
9. Ignoring the investment terms
Two investors can offer the same valuation and the same amount of capital but offer very different deals.
Look beyond the headline numbers.
Understand areas such as:
- board representation
- voting rights
- investor consent matters
- dividend rights
- liquidation preferences
- anti-dilution provisions
- future funding rights
- founder restrictions
- exit provisions
Investment terms can be complex and their effect may only become apparent later.
Make sure you understand what you’re agreeing to and take appropriate legal and financial advice.
10. Leaving fundraising too late
Capital raises rarely happen overnight.
Finding investors, holding meetings, negotiating terms, completing due diligence and finalising legal documents can take months.
Starting the process when the company urgently needs cash puts you in a weaker position.
You may have less time to negotiate, fewer funding options and greater pressure to accept terms you wouldn’t otherwise choose.
If you know the business is likely to require capital, start preparing early.
Preparation gives you options
A successful fundraise isn’t simply one where money arrives in the bank.
The objective is to raise the right amount of capital, on appropriate terms, from a funding partner who fits the future of the business.
Preparation gives you more time to find that partner and more confidence when negotiating the investment.
Know what you’re raising.
Know what the capital will achieve.
Understand your numbers.
Be realistic about valuation.
And start the process before you urgently need the money.
Connect with investors through The Brokerage
The Brokerage connects businesses raising capital with investors and funding partners actively looking for opportunities. Create your capital raise profile to outline your business, funding requirement and growth plans, and connect with investors whose investment criteria match your opportunity.