Starting a business is expensive — every cost from hosting a website to hiring a team quickly adds up. Unless you are independently wealthy or able to monetize right away, you will need a healthy dose of capital to pay the bills. But that doesn’t mean that you should rush out and start asking everyone you know for money or send an email blast out to every famous Silicon Valley venture capitalist.
Before you fundraise, stop and consider the best way to raise money that will be sustainable for your business in the long-term. I have personally raised over $20 million in funding for my two startups — here are five things I wish I knew to avoid.
1. Raising Capital Too Early
When it’s only your own money and time invested in a new business, you can stop a project at any time. The minute you have friends and family involved, you will feel intensified pressure to make your business successful. Christmas dinner with your girlfriend’s parents will feel very awkward if you have asked them to contribute and have since abandoned the project. Sure, you can keep it less personal by working with VCs, but you will be giving away a lot of equity in your company if you go this route.
If you can, try to bootstrap your business and use existing resources until you are sure of the route you want to pursue and what you truly need to get there. This way, you have an out if you choose to focus on a different idea or discover that you don’t enjoy managing a business.
2. Asking For Too Much Money
The amount of money you raise impacts the valuation or projected value of your business. In theory, it sounds great to share that your business is worth millions, but I know from my own experience fundraising that it actually sets a high bar for the growth numbers you’ll need to hit each month before you will be able to raise your next round of money. And if you fall short of hitting the right growth targets, it will incredibly difficult to get investors to participate in further rounds.
Instead of going after as much money as you can, set realistic budgets for the amount of money you need for 18-24 months of runway. Strive to overdeliver on the expectations of investors rather than overpromising. If you do that, your investors will be eager to participate in future rounds.
3. Fundraising During Slow Months
When investors are considering joining your business, they want to see that your growth is steady and that you are hitting new milestones. Consider whether your business has a seasonality and plan around that. Start fundraising during months you know your figures will help tell the story you are trying to share.
4. Forgetting To Network
The best investors provide more than a line of credit. They are smart people with great industry insight who can help shape your project. You should start to build meaningful relationships with these industry experts long before you need to raise a dime. If you can, strive to meet one new person each week who adds value to your project.
If you don’t know where to begin, start by making a list of businesses that intrigue you. You can use tools such as AngelList and Crunchbase to get a sense of the investors behind each project. Craft a personalized email or LinkedIn message that shares exactly why you hope to connect. You can also ask your existing network for introductions to relevant people they know.
Just remember that one coffee is not a relationship — when you meet helpful people, lean into those relationships and be sure to build on them!
5. Ignoring Your Instincts
The biggest mistake you can make is accepting money from investors who don’t fit your values. Your investors are your partners, and part of your team.
During our last round of fundraising, I got a bad feeling from an investor who promised $5 million in funding. I ended up ignoring my instincts and agreeing to work with the investor because of the large amount of capital he would bring. A few weeks before closing, the investor wanted to change all terms in the shareholder agreement and valuation, even though our metrics were exceeding the projections.
We decided to walk away from his $5 million with the support of our board members, who increased their investments to sustain momentum and set an example. Our other investors applauded this decision because it solidified in their minds how deeply we cared about our business and team. They ended up inviting friends to help join the round and raise more money. In the end, we only lost out on $500,000 and ended up with several new advisers and cheerleaders for our business.
Make decisions based on the long-term health of your business. That includes capping a round, setting a reasonable valuation, and finding investors you want to bring along for the adventure. Remember, it’s not about the amount of money you raise but how you use that money to grow your business.
Author Info: This article was first published by Ludovic Huraux on Forbes