The Wall Street Journal: Four Startup Mistakes Startups Make
For every startup that made headlines with impressive funding announcements in 2013, many more faded into obscurity because they failed to attract the capital necessary to bring their ideas to market. The truth is most startups make a lot of mistakes prior to and during investor meetings, which leaves even the best ideas grounded because of financial limitations.
Mistake #1: Not thinking big enough
Investors need you to target your product or service at a very large, addressable market. It’s simple mathematics. Investors realize a return when your venture’s value increases, and you can extract that increase through a liquidity event. There’s less risk for an investor if your addressable market is enormous—your venture doesn’t have to capture an unrealistically high market share for the investor to have the chance to meet his/her goal for a return. Think big, and then think bigger.
Mistake #2: No actionable plan for scaling your venture
To rapidly reach a large addressable market and maintain your competitive advantages, you need to be able to scale your venture quickly and efficiently. Too often entrepreneurs think only in the short term, failing to anticipate and plan for the challenges they’ll face in scaling the venture. It’s understandable—entrepreneurs wear a lot of hats in the early stages of bringing ideas to life, and many of these hats have to be donned on the fly to overcome urgent challenges. Nonetheless, you must have the discipline to look to the future, plan for the scaling of your venture and amass the resources that will be required to grow quickly and efficiently. If you can’t articulate a well-conceived action plan for scaling your venture, your chances of obtaining the backing you need from investors will evaporate. Remember, investors want a return, a large return, and they aren’t likely to realize that return unless you grow quickly and convincingly.
Mistake #3: Overestimating what your startup is worth
Given the sky-high valuations reported this year (i.e., Uber at more than $3 billion, Snapchat at $3 billion), it’s easy to understand why entrepreneurs would give into the temptation to overvalue their ventures. Doing so, however, can have some troubling ramifications. You could price yourself out of the market and fail to raise the funds you need because investors are turned off by the unreasonable value you placed on your venture.
In another scenario, you sustain the overly high valuation for one round of financing, only to fail to attract follow-on funding because you and your current investors don’t want a down round (a round of funding where the pre-money valuation is lower than it was for the previous round) that, frankly, could have been predicted by over-pricing the earlier round. Bottom line: Do your research on valuation, take advantage of online tools like Worthworm that exist to address pre-money valuation, and take the long-term view of your funding needs to help ensure a smooth and successful funding effort throughout the life of your venture.
Mistake #4: Waiting too long to seek funding
Timing can play a big role in the success of a venture and its ability to scale and grow. In established companies, among the roles of the CEO is strategic direction, including anticipating the company’s funding needs.
Usually, however, a startup CEO will take a daily operations role within the company out of necessity. As often happens, these daily challenges consume the CEO, and his or her foresight and perspective needed to plot the long-term course of the venture is impaired. Consequently, far too many early stage ventures seek capital at a time of desperation; at a time the venture is at its weakest financially. That may appeal to a certain type of investor, but is that the type of investor you want as a partner going forward?
Waiting too long to seek necessary capital compromises the entrepreneur’s negotiating leverage, which is likely to result in more dilution than would have occurred if the entrepreneur sought capital when the venture was strong. Investors are receptive to funding a promising company’s growth initiatives; they are less receptive, and forgiving, when approached to fund a venture that has promising plans but is so financially weak that it is grasping to find its future.
There’s a time for bootstrapping, but when it’s apparent you need capital to fuel your growth, pursue that capital when you are financially strong.
Curious about how much your venture could be worth? Or how to maximize your business? Or are you trying to do due diligence on potential investment deals? Or even looking for a world-class instruction tool? Then try a subscription to Worthworm, and let us help you.