Convincing someone to invest hundreds of thousands of dollars in your new business is no joke, especially if all you have is an idea. And while a good idea is one of the most crucial aspects to win over investors, there are various other factors that investors take into consideration when choosing which start-ups to back.
For instance, Willson Cuaca, co-founder of the prolific venture capital (VC) firm, East Ventures, shares that one thing that always stands out for him in an early stage start-up is company life.
“We invest long-term in our companies – we don’t have a short term exit plan. So founders must be equally serious about their business,” he told Asia Finance.
Meanwhile, Tong Hsien-Hui, director of Infocomm Investments Pte Ltd (IIPL), a VC firm that manages a fund size of over US$200 million, said a core element he looks for in early stage start-ups is a combination of team members and the product that they have.
“We have turned down a strong team with a weak product, as well as a weak team with a strong product. To us, these two elements must match before we make an investment,” he shared with Asia Finance.
At the other end of the spectrum, entrepreneurs need to know what to ask for and how to ask for it when trying to pitch their plan. This includes having sound knowledge of their target audience and deciding on how much capital is truly needed.
While there is no one single, sure-fire formula for success when raising rounds, start-up entrepreneurs seeking funding from potential investors need to avoid making these mistakes at all costs!
1) Not having the right team of people
Beyond your product idea, investors often look at the team of people behind it when it comes to choosing which start-ups to put their money on. After all, your team is what makes your idea happen!
One common mistake that start-up teams make is presenting itself to a potential investor with a missing link, such as one that is still looking for a tech guru.
It’s also worth noting that while it is common, a start-up doesn’t need to comprise of young people in their 20s. You can stand out for the right reasons if your team has the right experience as well as relevant contacts.
So whether your team is made out of experienced entrepreneurs or recent university graduates, as long as your team members have complementary strengths and skills with a track record of collaborating well, you should have a pretty solid shot at attracting some venture capital funding.
2) Over-complicating the tagline of your product’s key features
Many entrepreneurs live and breathe the details of their product or service, but still find it hard to effectively distill the concept into a simple idea that will appeal to investors.
But here’s the thing – you stand a better chance of actually winning over potential investors if you can condense the concept of your business into a clear benefit that is both compelling and dramatic.
While similar to an elevator pitch, taglines are catchier, more memorable and creates a unique identity for your product or service. So work this out before attempting to sell your vision to folks who you’re hoping would buy it.
3) Not having a plan for distribution
An idea is an idea is an idea, but it really isn’t worth much if you can’t get it to fit into the marketplace.
When you’re standing in front of investors, you must be able to answer questions like: who will buy your product, why, and most importantly, how will you get it to them?
Being able to explain the sales, marketing and distribution strategies will make your business proposition a lot more attractive and exciting, as it shows that you’ve already taken the steps required to successfully trial the market with your concept.
Further, a well-written and complete business plan will give you a much higher chance of successfully clinching the financial backing that you seek.
4) Being too greedy when asking for funding
Many start-ups are obsessed about raising as much money as they can in the fastest time possible. Because well, if you have a huge financial backing, then you have one less problem to worry about.
Ironically, more money could also mean more problems for start-up companies. For example, an investor could demand a larger stake of the business and greater control provisions to make sure that their money isn’t going to be misused.
Further, an artificially higher valuation can put a start-up under a lot of strain. And if things don’t go well, you might have trouble raising funds at a subsequent round, as other new investors might pass on the deal because it is “too expensive”.
To avoid this, start-ups can instead ask for less money and change their pitch to focus on a specific milestones of your business, such as getting past proof of concept. This will help protect your stake in the business as the smaller the funding amount you ask for, the smaller amount of equity you will have to give up.
You can always conduct a second round of fundraising afterwards, when your company will be further along the development stage and therefore, worth more. Demonstrating that you understand how all of this works will also make you more credible to investors.
At the end of the day, while venture capital firms have become the go-to funding source for start-ups around the world, it’s not the end of the world if you fail to secure funding. Here are six other financing options to get your business going!