Top Things to Avoid That Hurt Your Odds at Raising Money

Closing an investment is not just a function of the things that you do well, but also of the things you should avoid. Just as certain messages and characteristics can improve your odds, these mistakes can hurt your chances.

“Closing an investment is not just a function of the things that you do well, but also of the things you should avoid.” 

• Complex vs. Simple. Less is more. Investors look at lots of investments. They need to be able to “get it” and see the potential without all the details. This can be hard because we know (and have lived) all the details. But our job it to distill that down into something that is simple and compelling.“When Clive Davis, the music industry legend known for discovering Whitney Houston and helping artists such as Earth, Wind and Fire, Aretha Franklin, Rod Stewart, Alicia Keys, Barry Manilow, Christina Aguilera, Carlos Santana, Kelly Clarkson, Leona Lewis and Jennifer Hudson was asked how he chooses artists from all the clutter. His response was that he chose songs “that made him tap his feet.”Investors need to tap their feet.
• Using Market Share as Your Financial Projection. Investors are skeptical when a company forecasts revenue as a percentage of an addressable market. Investors want to see that you understand the drivers of your revenue, such as the number of salespeople times an annual quota or a number of consumers times an average purchase. Not only is this approach less reliable, but it makes investors feel that perhaps you have not done your homework to understand the market enough to deserve their capital.
• Dismissing Competition. Competition comes from everywhere in this day and age. Every entrepreneur has to constantly ask herself, “Is there a competitor that is further along, better financed and ready to pounce?” In days past, that might have been confined to the competitor across the street. Now you ask yourself if there is a competitor in Shanghai, Bahrain, or Mumbai that wants the same market. This doesn’t just apply to larger companies. The local jewelry store used to compete with the jewelry store in the next town. Now they can be put out of business by an online jewelry store halfway across the globe. Did any taxi driver think that they would be competing with anyone who could drive a car? Seen any Blockbuster stores lately? You must not downplay this, but rather come to the table with the realization that their is intense competition in your market and a plan for you to win versus that competition.
• Having Faith in The Wrong Team. Smart investors know what the right team looks like. They want leaders and founders to understand what the right team looks like and not simply that the current team will take the company to the next level. Instead of talking about the current team with unrealistic expectations (which investors sniff out right away), talk about the strength of the current team side by side with the new team members or different skills you will need as a company to succeed. This does not mean you are not loyal to your current team, but simply that you understand what the company will need to be success and how to put current team members in a position to succeed.
• Not Providing a Flexible Financial Forecast with Tools to Play with Scenarios. Both you and investors will want to be able to see how different assumptions drive the business over a multi-year period. What if we changed our price over time? What if we starting selling to a different market? Investors want to be able to run “scenarios”. If you come to the table with a financial model that is fixed and doesn’t provide them this ability, it makes it harder to evaluate your investment. And if you make it harder, you decrease your chances.
• Not Connecting The Financial Model to the Story. You have to help investors “connect the dots” from your strategy to the financial plan. The way you approach the market – which you are arguing is unique in some way – has to connect to what are the financial drivers of the business. If investors cant see how your approach translates into the financial projection with some level of simplicity and credibility, the investment process becomes more difficult.
• Not Knowing Your Market. Investors want to see leaders and teams that really know their markets. Understanding the competition, how your product or service are unique, your pricing model, and how others have approached your market are critical to creating something that stands out from the crowd. When you don’t do this, it not only undermines credibility in your business plan, but the credibility of you and your team.
• Saying You are Awesome and Using Superlatives. Savvy investors aren’t swayed by the use of superlatives to pitch or vet a business. They have heard hundreds of entrepreneurs tell them they have “the most” revolutionary, “the strongest” new technology or “the best” user experience. When they hear these words, they may assume either that you have true belief in your idea, or that your passion clouds your judgment and the ability to face reality and respond accordingly. If the business is “the greatest” discovery yet, let them find that out without saying it. Avoid attaching human characteristics to businesses. Businesses don’t have emotions. When you attach human emotions to businesses, it strains your credibility. In your job, do business solutions come across your desk where you say “I love that”? You might “love” a person, a dress, a book or a dog. you don’t “love” accounting software.
• Avoid Talking about Deals that Aren’t Done Yet. When you mention deals that aren’t finalized, investors say to themselves, “If they are mentioning things that aren’t done yet, they don’t have much done.” Remember, most savvy investors are skeptical.
• Avoid Deal Fatigue. Many people say things like, “With your business, getting investors should be easy” or “You should be able to close an investment in a month.” Anyone who says that has never raised money. Raising money is hard and takes time. I know, you need money tomorrow and this creates a great amount of stress. You have to avoid what they call “deal fatigue”—the fatigue that comes with how long it takes to get investments done. It is a marathon, not a sprint. If you believe your investment negotiations will be completed in a finite number of days—and you’re wrong or simply unrealistic— that miscalculation, especially if regularly repeated, will wear on you. Assume six months. If you do better, great. Don’t think you are closer to the end than you are. Go through the process. Don’t get too up or down. Keep plugging along. There will be plenty of time to celebrate when it is done.

Stay away from these things. Even though some of them may seem harmless, they can erode your chances for success with investors.