An investor’s guide to successfully raise seed fund for your startup

Here’s a compilation of fundamental lessons that every early-stage startup must go through once. A lot of these lessons are going to help you throughout your entrepreneurial journey.
424 CLAPS
0

The primary goal of any startup is to disrupt the status quo of the market with a predictable, scalable, and more viable business model. Startups are by design created to rattle the vertical incumbents and to create new market verticals altogether.

They are young emerging enterprises that fill gaps with an innovative approach or eliminate complexities from the ecosystem at large. Agility is embedded in their inventive thinking as they are in the constant endeavour to develop the latest breakthrough.

However, early-stage startup founders tend to make several common mistakes. For instance, nearly all of them love their dreams for the future, which is good in a way. What’s not good is that they do not learn from the ‘Hall of Epic Failures’ of other startup founders as they go about it.

They are on a journey to create history without learning from history. Perhaps why, a majority of startups end up failing before seeing the light of day. 

So, here’s a compilation of fundamental lessons that every early-stage startup must go through once. A lot of these lessons are going to help you throughout your entrepreneurial journey.

An unexplainable idea

What’s an idea that is not easy to explain or cannot be communicated?

It’s precisely that, ‘an idea’. However, if you want to take it beyond the ideation stage and bring it on the drawing board with your potential investors, you have to make it understandable before the interest fades out.

In fact, founders typically pitch their technology product and not a business. You must keep in mind that investors are more interested in the latter than the former. A complex idea or technological jargons would make little sense to them.

Building it from the scratch

A lot of things are important in this world. Working on everything at once from the ground up is not one of them.

While doing so, you might end up overlooking partnerships or overbuild the product itself. You indeed have greater control over the entire technological construct with custom codes.

However, it also takes time and often more time than you can afford. With multiple projects running concurrently, a delay in any one of them can leave you in a spot.

Everything, from your priorities to your go-to-market strategy, will end up in chaos. Instead, you must streamline everything and enter into partnerships wherever possible.

Achievements versus aspirations

A common mistake that founders usually make is hiring people exclusively based on credentials. Your startup might lack on several fronts if the people you onboard have no hunger to achieve.

Also, people with credentials can come with the baggage of entitlement, expectations, existing commitments, and an inflexible style of working.

During your initial market journey, any hire can make or break your future.

Eating more than they can chew

Though it’s good to try to raise funds and be successful at it, eating more than you can chew is not the best way forward.

Raising more money than you need will make you splurge more. Sooner or later, you are going to lose financial prudence. Having limited capital resources, on the other hand, will make you and your team find out innovative ways to be more cost-effective.

This will also bring a world of difference later during your drive towards profitability.

Products that no one needs

Every startup founder enters the market with a hypothesis — they are solving a massive problem that will make every customer go head over heels.

Based on the initial evidence of success, they go all-in, and their venture disappears into oblivion shortly after. Such approaches put you on wrong track.

You have to keep assessing and reassessing your traction during every successive phase of your market journey. Always make sure that the market for your product exists and keeps on existing as you expand.

Frugality in the trash can

Such founders care little about finance, cash flows, and prudent use of funds. They spend recklessly, and that too, on things that have little to no financial dividend.

It could be anything — from fancy office furniture to parties, promotions, or customer acquisition drives — that cause nosebleed to their ventures. They feel they are not accountable. What they forget is that market is a time capsule that makes them a case study of what not to become, acquire, or hire.

Too early, too big

The startup can get choked serving a big customer. The bigger the client, the more resources it will consume to develop and deliver the product. It will also take time.

Since the startup is in its early stages, the founder even starts customising the products and services for the big customer, creating financial dependency.

Superman founders/Lone rangers

These type of founders are lone rangers. They’re very good at something, but they are equally miserable while working with a team. They rarely trust and do not delegate.

At the end of the day, every founder is a human. No one has unlimited hours or the energy to solve everything. Such startups face challenges while scaling and often stumble upon decision fatigue.

Raising money from wrong investors

Raising capital is tough. However, it becomes lethal if you end up doing so from toxic investors with no reputation whatsoever.

Early-stage startups are fragile, and there’s a lot of nurturing that needs to be done. Your investor is not merely someone who injects capital into your business. They also have to be good mentors and help their portfolio companies get in ship shape. They are also pivotal in driving market tie-ups. 

Income generation, not wealth creation

Your first and foremost priority should be the financial health of your startup. At early stages, founders who have raised capital starve the business and feed salaries to themselves. It is barely a surprise that the business suffers as a result and fails.

Indeed, you cannot do away with salary, but make sure to keep it for sustenance as much as possible. If your startup succeeds, you anyway are going to be the biggest beneficiary. Don’t starve your high-potential business for petty cash.

Multiple trains of thought

Startups, trying to offer everything to all customer segments, do not scale for a reason. Such businesses can neither build expertise nor can they create a leadership position for themselves.

At the same time, their revenue model becomes too complex, the business heads in multiple unrelated directions, and there is a whole ball of wax in terms of challenges.

Tech perfect from Day 1

It’s not bad for seed-stage startups to aspire for a world-class offering. If you’re on a spending spree while buying technology and recruiting people without engaging your customers, it is a recipe for disaster.

There should be customer validation for your MVP. Otherwise, the capital and manhours invested are technically written off. Also, do not get your MVP validated by the investors only to keep them happy. If you’re doing so, it is by and large the same thing.  

Cost and pricing issues, weak business model, and me-too offerings

There should be a visible path to profitability. Having cost and pricing issues or a weak business model will not serve the purpose. Me-too offerings should also be avoided to the very extent possible.

It is because every business has different priorities at different stages of growth, you might have a different set of priorities and value proposition than the business or service that you want to emulate. Simply avoid doing it.

Building a castle without a moat

Back in the day, moats served a purpose. It was to protect the castle from all sides and prevent the entry of an invader, thereby giving a strategic advantage in terms of defence.

Your moat is your unique IP or the barrier(s) to entry that others might experience. They help you in not getting out-competed by other new market entrants. It will give you enough time to spot and prepare to topple your competition as and when it appears.

Equity allocation

Early-stage startup founders often do not understand the importance of the equity cap table. It makes them dole out large chunks of double-digit equity to employees, consultants, and advisors.

The equity is further granted without vesting and understanding the buyback options. Any cap table with heavy dilution drives the venture capital away. If you’re compensating with equity, you are financing your business in the costliest way possible. 

Launching a product ahead of its time

If your timing is not right, it’s the end of the story. You cannot make your business linger in the market for several years or decades. How will you manage finances till then?

In fact, studies indicate that timing is the telling difference between successful and unsuccessful startups about 42 percent of the time. So, if you have an unconventional idea, perhaps it’s time to get back to the drawing board.

Cash burn

If you try and remember, a lot of startups, including unicorns, are no longer functional. A majority of the time it is because they were burning cash with no definitive plan of action.

After a point in time, they are bound to run out of capital, and investors are no longer ready to fuel their splurges. They simply did not meet the milestones that were a part of their term sheet — the Bible investors swear by. You must focus on your ‘Zero Cash Date.’

Keep it transparent and align everyone with it in the company. Also, keep all investors, including F&F, updated every 30 to 60 days.

Thinking that they are always right

Why did Nokia fail? It was the biggest phone company at a time. A few years down the line, it was in shambles with its CEO shedding tears in a news conference. The reason was that Nokia created an army of ‘Yes Men’ who did little to bring about changes that would’ve transformed the company.

Smart entrepreneurs surround themselves with smart people, and they listen to them. Don’t become overconfident about your prospects and naive about your problems.

Make your employees feel valued and use their counsel. Even if you initially do not agree with their suggestion, try to see things from their perspective. What if you might have not considered something that they did?

Uncalculated risks

Risks are a part of the business that need to be taken at some point or the other. However, make sure if you have to take a risk, it is a well-calculated one. Some of the smartest founders I’ve come across can visualise every angle of a problem, and all potential outcomes.

If you’re going for a pivot, don’t do so without weighing the pros and cons. Otherwise, you’d not be doing what prompted your investors to invest money in your startup. Also, avoid taking too many major steps at a single time. 

The startup limbo

It’s easy to lose track after a few months or years of starting the business. But it’s also why not everyone is an entrepreneur. The idea is interesting initially and keeps the founders motivated. However, when a lot of water has flown under the bridge, the enthusiasm starts diminishing, there’s no excitement at work, and self-sabotaging tendencies start propping up.

In other words, the startup has neither failed nor succeeded. It’s just in a never-ending state of limbo with no progress whatsoever. You have to be mentally strong and resilient with the power to make decisions that need to be made. If it is so, don’t get yourself into the sunk-cost fallacy and start afresh — but treat it as your last option.

In a nutshell, all startup founders should avoid these mistakes and make emotionally intelligent decisions that change the fate of the market and the people that the startup is associated with.

Edited by Suman Singh

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

Latest

Updates from around the world