Inadvertently, all loses.
Introduction: Funding is the energy of this machine of the startup company. Without the funds, the machine can’t run. Financing is an important issue that most entrepreneurs will have headaches. The original author Tim Jackson has been an entrepreneur and now an investor. Based on his own industry experience, he summed up the seven mistakes that entrepreneurs can’t make in the financing process. Alpha Commune (public number: alphastartups) introduced it to compile it, hoping to provide reference for domestic entrepreneurs, helping everyone to make less detours in financing.
In a number of entrepreneurial seminars, I asked more than 20 entrepreneurs a question: What challenges did you encounter during the startup process? As a result, about half of the entrepreneurs’ feedback is focused on one topic: financing.
Why are these entrepreneurs worried about financing, and there are not many other important things in entrepreneurship, such as products, teams, and customers, which can improve their competitiveness. Further reflection, I found a truth, If you think of a startup as a machine, then all of the above mentioned are important engineering problems, can build the skeleton of the machine and make it run faster. But the financing is different, the money is energy, there is no energy, and the machine can’t run.
I was a serial entrepreneur and now an investor and business consultant, who has experienced and observed the financing activities of startups from different perspectives. As an entrepreneur, I understand how they are prepared, what they are worried about and what they are afraid of, and what kind of help they need; as an investor, I have invested in many companies and are members of their board of directors; as a consultant, I have helped 10 More than one entrepreneur has received more financing. Now I have sorted out these experiences and refined them into the seven major mistakes that entrepreneurs can’t make while financing. I hope to help more entrepreneurs get the company’s growth and growth.
Error 1: Choosing the wrong intermediary
Many entrepreneurs look for financing intermediaries, such as FA, when they step on the pit. Or it is to spend unnecessary costs, and more seriously, the effect of financing is not satisfactory (such as the BP of FA Haitou entrepreneurs, leading to the company’s reputation in the circle).
For me to find FA, my suggestion is, If the company is in the early stages, the investment organization’s decision on the company is qualitative rather than quantitative, then the answer is no; if the company hasEntering the growth stage, the answer is yes, but be careful to choose the right FA.
For entrepreneurs, the significance of FA is to help you get financing faster, because spending too much time on financing will keep you away from the company’s business and operations. For example, an entrepreneur I know, he encountered a lot of resistance in financing, but after finding a suitable FA, FA assisted them in preparing all the necessary information for financing, and determined the current round of financing with entrepreneurs. The target is valued at $100 million. After several rounds of meetings with potential investors, they eventually got financing in accordance with the target valuation in a short period of time.
Seeking FA’s help does cost, but if you can get entrepreneurs to focus more on the business, this cost is valuable. The choice of FA depends on the success rate of its past recommended projects and the reputation in the venture capital circle. Some FAs that are incapable, untrustworthy, and even digging between entrepreneurs and investment institutions must be screened out, and these need to be fully communicated with other peers in the venture capital circle.
Error 2: Too few potential investment institutions are in contact
To find a favorite partner, you must first find a boyfriend or a boyfriend, but to find a boyfriend or a girl, you have to know a lot of the opposite sex, and then date with him or her. The same is true for financing. To get the investment of an ideal institution, you must first contact enough investment institutions.
I have a better analogy: The process of financing is like selling B2B products. At every stage before signing, it is possible to lose customers. We need to measure the conversion rate from each stage to the next stage. In order to improve the overall success rate.
For example, suppose the five stages that an entrepreneur has to go through to get a Term Sheet are: 1. Send an email to an investment institution, 2. Call the investor, 3. Meet with the investment manager, 4. Invest in an investment institution Staff visit your company, 5. Meet with investment partner. If the success rate of each of these 5 stages is 50%, then your overall conversion rate is: 50% x 50% x 50% x 50% x 50%, which is 0.55, just over 3%.
This means that entrepreneurs need to contact more than 30 potential investment institutions to get a Term Sheet. If entrepreneurs need to introduce three formal investment institutions in this round of financing, then he needs at least 90 Contact with potential investment institutions.
It’s important to note that this does not mean starting a business.You can randomly look for 90 investment institutions to try your luck. Entrepreneurs should first do research, find potential investment institutions that match their own tracks, fields, and stages, and have to contact them in a targeted manner.
Error 3: Do not carefully select the appropriate investment institution
Entrepreneurs who first start a business often face difficulties in financing and are rejected many times, which makes them frustrated and make mistakes. The mistake is that once an investment institution expresses its willingness to invest, or even is willing to have further contacts, they will be very grateful and blindly accept such investment.
But things shouldn’t be so fast, In this case, the more entrepreneurs have to seriously distinguish and filter investment institutions. When identifying potential investment institutions, ask yourself the following questions:
Do they have enough money to vote for you?
Does their investment stage and investment size match your company?
Is the investment activity in their recent period positive?
Does they have enough layout and accumulation in your field?
In other words, are you the type of company they want to vote for?
How much power does the investor in contact with you have in his organization?
Error 4: Miscalculation of the seriousness of the investment institution
The financing process is a long journey, as mentioned in the second part of this article, going through many stages. Entrepreneurs need to be realistic about financing and have a clear grasp of the stage of financing.
Many of the investors you contact, their enthusiasm for the realization of your company and business may be related to their personality, and does not mean that the possibility of obtaining investment can be improved. For example, juniors in some investment institutions participate in many activities and conferences in the venture capital circle. Their contact with the founders is sometimes to understand the industry and collect data, even if they are interested in your project, butThere is not much decision right.
When entrepreneurs come into contact with the partners of investment institutions and have deeper exchanges with them, financing has become even more reliable. But there is still a pit here. In a larger investment institution, each partner’s decision-making power is different, and entrepreneurs have the next big point.
When entrepreneurs are invited to meet with multiple partners in an investment institution, the financing process is nearing completion. Sometimes entrepreneurs are invited to perform roadshows at conferences where multiple partners attend, and they usually decide on the same day whether to invest in startups. One of the more favorable conditions for entrepreneurs is that a partner from multiple investment institutions visits a startup, which represents a shift in the balance of power in the relationship: investment institutions are trying to convince you to accept their investment. Your company is more beneficial.
Finally, the decisive step is to get the Term Sheet. Investment agencies only need half an hour or less to print a Term Sheet, but this represents a commitment to represent their formal willingness to invest. Investors will also conduct due diligence on the company after giving the Term Sheet, but this is indeed an important milestone in financing.
Avoiding the four mistakes mentioned above, a good founder should be able to get the Term Sheet smoothly. Is this round of financing stable? Don’t worry, get the Term Sheet, and a series of processes such as due diligence, there are still risks in the process of receiving funds in batches. The mistakes that the three entrepreneurs mentioned below may make will be serious and far-reaching.
Error 5: No cash management during the financing period
I know a very powerful founder. His company is a rookie in the travel industry and has a deal with big companies in the industry. At that time, the terms and conditions had been agreed, various documents were ready, and the transaction is expected to be completed by the end of the year. But then, the big company found a problem that could not be traded according to the originally agreed terms; they said that if the transaction is to continue, the price must be reduced by 40%.
The problem that the big company as a buyer found was that the company’s cash reserves were insufficient, which would bring hidden dangers to the company’s subsequent development. If the acquisition is not completed within the planned timeframe and the new funds are not injected, then the startup is likely to die in a shorter period of time.
Another opposite example is: A female founder, her A plan is to start financing 8 months in advance, complete financing in 6 months, and reserve a two-month buffer period. However, she finally chose Plan B. Not only did she start financing activities 8 months in advance, but she also received a sum of money from the old shareholders in the form of bonds. The cost of this form of financing is quite high.
But this entrepreneur is therefore more calm and smooth in the subsequent financing process, and no problems have been found in the course of due diligence. After that, she repaid the debt with higher interest rates, and also gave the company the funds to continue to grow.
The lessons from these two examples are straightforward: Grasp the pace of financing, set aside enough time, and manage cash in the financing process to ensure that you have good solvency.
Error 6: “Surprise” to investment institutions during due diligence
Venture capital institutions, unlike investment institutions in the secondary market, can buy and sell in a short period of time according to new market conditions, reducing losses or expanding profits; similarly, startups are not like listed companies. Regular financial reports will be made to let investors (both institutions and individuals) know the true state of the company. When a venture capital institution invests in a company, its funds will be locked up for a long time, and its means of understanding the real situation of a startup company is the due diligence of the founders in the financing process, which is due diligence and problems found in due diligence. The negative impact on financing is self-evident.
In the due diligence process, investment institutions want a comprehensive understanding of the startup’s situation, including financial status, technology, and intellectual property, business, and customers. For example, the company’s statements in the past few quarters, whether these statements have been audited, the company’s liabilities, the company’s income, the company’s forecast of future revenue and profit growth is reasonable and feasible; the company has which patents, which trademarks, which are protected by copyright Whether the product infringes on the intellectual property rights of others; how many customers the company has, how much revenue each customer generates, how satisfied the customers are, how the company continues to acquire the customer’s capabilities, and so on.
Entrepreneurs must do three things in the due diligence process: Be prepared, don’t hide, don’t exaggerate and falsify. Be prepared to clearly define what content and materials the investment institution wants to know in the due diligence, prepare the information in advance, and do not wait until the investigation process to find out that many materials are missing.
Don’t hide it. It’s very simple. If the company has weaknesses in some areas, it should be disclosed as soon as possible, even without waiting for due diligence. In the early stage of communication, you can honestly let your investment institutions know about their strengths and weaknesses. If they are willing to vote for you, then these weaknesses can be accepted and compensated.
Among the three points, the most taboo is exaggeration and falsification. It’s very legitimate to highlight your strengths in the financing process, but if you highlight this advantage, the data or qualifications behind the support are watered or even forged, then this behavior is discovered in due diligence The loss of entrepreneurs is not only the failure of this round of financing, but also the bankruptcy of credit in the venture capital circle. Everyone will question the character of this person and then lose trust in the company. Even if such an entrepreneur is lucky not to be found guilty, the model supported by false data is likely to be unable to run through, and ultimately it is still self-sufficient.
Error 7: Trying to get a high valuation over market price
In an exchange with other investment peers, an investment partner said that a founder tried to persuade him to complete the transaction at a price 30% higher than the valuation he had originally determined and was eventually rejected.
Really, higher valuations can get more money and get the fuel that makes the company grow stronger. However, when a startup and an investment institution play a game on valuation, it is usually not easy to gain a dominant position. Because entrepreneurs evaluate the market price, they usually come from the disclosure of financing information of their own similar companies in the open channel, communicate with their peers or their own round of investors (if your relationship is good enough). Investors may have comprehensive and systematic research on the entire industry. They have seen and even talked about hundreds of companies, and they are more able to grasp the fair value of similar companies. Entrepreneurs can work hard to get a fair valuation, but don’t blindly pursue a premium valuation, because it not only affects the judgment of the investment institution, but also withdraws from this round of financing; even if this round receives a premium Valuation will also have a negative impact on the next round of financing, which is a double loss situation.
If entrepreneurs can avoid the above 7 mistakes, then they should be much smoother when financing. Finally, we still want to emphasize a basic principle, that is, return to the business: how outstanding your product is, whether you have enough high-quality users (customers), how much income you can get, whether there is high enough profit margin, and the speed of growth. How fast. These things are the foundation to support your financing and the key to your company’s survival.
This article is compiled from medium.