Funding Your Startup: Lessons Learned (and Advice on Avoiding Missteps)
Skipping your workout. Losing touch with a good friend. Getting sucked into Facebook/Instagram/Fantasy Football when you’re supposed to be practicing your board presentation. Hey, we all do stuff we regret. Yes, even whip-smart tech entrepreneurs stumble from time to time. Take funding, for example. A recent financing survey by The Alternative Board (TAB), which provides business advisory boards and coaching services for small businesses, found that when it comes to raising money, many entrepreneurs would do things differently if given a second chance. Fortunately, we can learn from their mistakes. Matthew Storeygard, a director of investments at Connecticut Innovations, weighs in.
Funding Regret #1: Borrowing at the wrong time.
Thirty-four percent of entrepreneurs in TAB’s survey said the most important funding lesson they learned was to borrow at the right time.
Expert fix: “Timing is key,” says Storeygard. “Entrepreneurs should always be thinking ahead regarding their capital needs, and should understand the critical milestones they must hit to drive value.
“It’s best to approach venture capital firms and angel investors or other sources of funding earlier rather than later. That way, you can get on their respective radars. It’s okay if your first contact isn’t a pitch for funding. Sometimes that’s even better because you can get feedback in a lower-pressure environment.”
Pro tip: The risk of approaching funding sources too late is greater than the risk of approaching them too early. Why? “If an investor senses desperation, you’re not likely to get as good of a deal as you would have otherwise,” says Storeygard. “You will also be unable to generate the feeling called the Fear of Missing Out (‘FOMO’) that helps drive valuations.”
Funding Regret #2: Borrowing from the wrong source.
Thirty-four percent of entrepreneurs also said they wished they’d borrowed from the right source. Banks, personal savings accounts, friends and family, government grant programs, venture capitalists, angel investors—when it comes to funding, there are many avenues to explore. It’s easy to see how an entrepreneur could get it wrong.
Expert fix: “First and foremost, it’s important for entrepreneurs to understand the market, and to know which milestones are necessary for funding,” says Storeygard. “Software companies can build a minimum viable product and begin to test the market with minimal resources, so for them, it’s better to push off raising from an institutional source if possible. On the other hand, biotech, medical device and other capital-intensive industries don’t have that luxury. For these industries, non-dilutive funding is the most attractive avenue with which to begin.
“The federal SBIR program is suited for small companies engaging in research and development that is of interest to the federal government and its various agencies. Many grant opportunities are available and can provide financial resources for an entrepreneur to continue developing the company’s concept or product without dilution. Angel investors and VCs are the right source when the entrepreneur has a clear understanding of the path forward. For some industries, this may include an understanding of the regulatory path, costs for validation and data gathering, and revenue targets that next-round investors want to see. Venture debt is another source of funding that entrepreneurs can consider, but it is best to look at this source after you have significant cash flow with which to repay the debt.”
Funding regret #3: Securing the wrong amount.
Looking back, business owners responding to TAB’s survey indicated that they should have borrowed more (29 percent) rather than less (11 percent).
Expert fix: “You need more than you think you need,” says Storeygard. “Entrepreneurs are optimistic by nature; if they weren’t, no one would ever start a business. Ventures always cost more and take longer to develop than one thinks, so it’s better to err on the side of raising more. As an investor, I understand that entrepreneurs don’t want to give away too much of their company and suffer too much dilution. However, in my opinion, the correct way to look at it is that a smaller piece of a large pie is better than a huge piece of no pie, which is what you end up with if you run out of money.”
Pro tip: Ask for more than you think you need.
Funding regret #4: Not having the right adviser.
Thirteen percent of business owners said they regret not having the right adviser.
Expert fix: “It’s really important to have good advisers—people with whom you can be completely honest and vulnerable,” says Storeygard. “The co-founder model works well because being an entrepreneur is such an intense experience that it’s important to have a sounding board. Beyond that, outside advisers can help to open doors and provide specific expertise, and can be completely aligned with the goals of the company. As far as your VCs go, they certainly can and should be advisers, and most of the time they are aligned with you. However, there are times when VCs need to make difficult decisions where they are not totally aligned with the startup’s founders; for example, when they’re deciding whether or not to invest in a follow-on round or whether to replace the CEO. My advice is to find advisers who are experts in your particular field, and find them early.”
Pro tip: You can find advisers by networking at conferences, meetings and the like, and while it takes hard work, persistence and ability to withstand rejection, these are qualities successful entrepreneurs already possess.
Regrets? Like Frank Sinatra, you’ll still have a few. But if you learn from other entrepreneurs’ mistakes, they likely won’t be related to funding.
Interested in learning more about this topic? Check out our other funding resources.