Bookmark and Share

The 6 Biggest Mistakes in Raising Startup Capital

By BRAD SUGARS
Posted: 2008-06-26 13:58:02
Filed Under: Small Business Funding
Avoid these traps to increase your chances of securing funding and keeping investors happy.

Entrepreneur.com

In the movie Little Fish, a video store manager played by Cate Blanchett applies for a bank loan to buy the business and expand into online gaming. When her application is rejected, Blanchett hurls a framed photo of the loan officer's child across the room in fury. Anyone who's suffered a similar setback knows the feeling.

The business landscape is littered with would-be entrepreneurs who've stumbled in their search for startup capital. Many requests are denied. Those who pass the test frequently have unacceptable strings attached. Some deals that close come back to bite the business owner in the form of onerous debt, insufficient revenue share or worse.

Part of the problem lies in the nature of the startup endeavor. Freshly minted entrepreneurs are typically major risks for lenders because they lack business experience, collateral to secure the loan or both. Neither family, friends, banks, venture capital firms nor angel investors are interested in losing their investment. You can't blame them for not wanting to take a risk on a venture without a reasonable probability of return.

On the other hand, many financing efforts fail because of avoidable mistakes that are made in pitching potential lenders, structuring the agreement or managing the money once the deal is done.

Steering clear of these missteps can increase your chances of success, both in obtaining startup funds and keeping the money flowing. Be sure to avoid these blunders:

1. Half-Baked Business Plans

There's nothing worse than going into a money meeting unprepared. If you haven't put the time and energy into writing a full-blown business plan complete with elements, such as a cogent business description, financial projections and a competitive market analysis, the people with the cash won't put the time into evaluating your proposal.

The SBA is a good source for learning how to write a business plan as well as sample formats.

2. Focusing Too Much on the Idea and Too Little on the Management

It's not enough to convince potential backers that you've invented the next must-have gadget or can't-miss clothing store concept. You also need a team that can generate the revenues to repay a bank loan or provide an exit strategy for a VC or angel investor. Many business novices ignore the second part of the equation; that can doom their money quest.

The greatest racehorse in the world still needs a great jockey to a win a race. The same principle applies in business. Showing that you have recruited a top-notch salesperson, a skilled marketer, an accountant with startup experience, other key personnel, and even outside experts like an attorney or business coach who can supply professional guidance is essential to finding a funding source.

3. Not Asking for Enough MoneyIn a 2004 U.S. Bank study of reasons for small business failures, 79 percent cited "starting out with too little money" as one of the causes of their collapse. That's often because entrepreneurs who are wet behind the ears don't realize that they should calculate their borrowing needs based on their worst-case scenario instead of their best-case forecast.

Related Video

    An old accounting axiom says that everything will take twice as long and cost twice as much as you expect. While that may be an exaggeration, new business owners are frequently too optimistic about how soon they will begin to fill their cash pipeline and how fast the money will flow. If you're underfunded, you won't have a cushion to tide you over in the event of slow initial sales or unexpected market conditions.

    4. Having Too Many Lenders or Investors One of the hazards of securing financing from multiple sources is managing too many relationships and expectations. It takes time away from your core business. These not-so-silent partners may have conflicting interests or demands and the consequences can be devastating.

    This is particularly true when you raise money from friends and family. One hairdresser I know borrowed money from seven or eight relatives to open her own salon. The business was successful, but there were perpetual battles over how the profits should be distributed. The arguments couldn't be settled to everyone's satisfaction, so the salon was forced to close.

    5. Failing to Get the Proper Legal Agreements This is arguably more important than a prenuptial agreement for a couple with significant individual assets. Every lender or investor eventually will need his money back, and a legal document covering everything from the terms to the timing can avoid the kind of acrimony just described.

    6. Poor Cash Flow Management Too many new business owners burn through their seed money too quickly and fail to reach cash flow-positive status in a timely manner. Some causal factors, such as late product deliveries and economic downturns may be beyond one's control, but the executive team is clearly at fault for others, such as unnecessary spending and overly optimistic expense/income forecasts. Financial sponsors don't take kindly to that sort of mismanagement. And if they turn off the tap, all of your hard work may go down the drain.

    There are other pitfalls to avoid, but the bottom line is this: Play by the lenders' rules to get them to open their checkbook, but protect yourself at the same time. There's no point in launching a business that will eventually sink under the weight of your investors' demands. If your business plan is good enough and you approach the right people, you should be able to whistle all the way to the bank.

    Brad Sugars is Entrepreneur.com’s Startup Basics columnist and the founder of Action International, a business coaching franchise.

    More on This Topic

    1. Bootstrap Financing
    2. Unconventional Financing
    3. Keys to Getting Funded
    4. Ten Funding Faux Pas


      2005-12-13 18:29:54
      Bookmark:

      Recent Comments

      Post Your Own  
      1 - 10 of 13
      13 comments

      merbill 02:25:54 PM Nov 04 2008

      Report This!

      When you start a business, make sure it is in a field you like and, most importantly, you UNDERSTAND ! Plan your work and work your plan. Be realistic in your profit expectations and don't buckle just because something goes wrong. Mistakes will mean more to you when they are done "... on your nickle"! And, quite seriously, good luck and go for it.

      jaqkmq 08:36:46 AM Oct 10 2008

      Report This!

      My sister and brother - Fannie Mae and Freddie Mac - tell me that I need to make sure I pay off all that I owe, open a bank account @ Hip City National Bank and eat very lean. If we all do this - the country will go belly up! I think we should want our spending to a point, but more than anything - watch our borrowing!! Who is lending and can you really afford to borrow?

      jaqkmq 08:33:33 AM Oct 10 2008

      Report This!

      I work from home after being a recruiter for 20 years. This is a very gratifying job. Medical recruiting is still extremely strong. You charge a fee for finding a nurse, pharmacist, speech therapist, etc., Get involved in other alliances, to help you recruit and split the fee. Old fashion word for "head hunting" but it pays the bills, in a six figure number!

      thesinger23 04:41:12 PM Oct 09 2008

      Report This!

      Thesinger23@aol.com What has happened to our economy is not just one person,I actually I say it is allour fault, I call it greed.Nobody wants to take the responsibilly for their actions. Thisincludes 1 the president 2vice president and the presidents cabinet. Next all the bigcorporations and their ceo, big money no care of any one else greed, makethem return the money, they do not deserve it, since it is the tax payers money.America needs it for the future of tomorrows children. You no who you are soreturn it now.

      sswiftsolutions 12:32:19 PM Oct 09 2008

      Report This!

      Had enough of Wall Street? Don’t you think it is time for some Golden Rule Capitalism? If your answer is YES, then you need to check out a wonderful and unique business opportunity to bless everyone who participates at Golden Rule Capitalism Dot Com.After all, the time has come for everyone to experience God’s promise found in Malachi 3:10.“Bring ye all the tithes into the storehouse, that there may be meat in mine house, and prove me now herewith, saith the Lord of hosts, if I will not open you the windows of heaven, and pour you out a blessing, that there shall not be room enough to receive it.”If, on the other hand, your answer to having “enough of Wall Street” is no, well don’t worry, blessings come even those who don’t think they need God’s help, because that is the way God works.

      markg2828 09:13:01 AM Oct 09 2008

      Report This!

      I started my paving business 10 years ago with help from the Small Business Administration. They helped me write a business plan and loaned me just enough to pay for needed equipment. I'm still a small business, but I wouldn't even have that without the SBA. Take a look! www.Elitepaving.net

      musicwise 01:11:24 AM Sep 15 2008

      Report This!

      I have come across the best work from home business there is if youre serious and tired of scams call John at 1-877-365-4718 to learn more

      myinternetsite 03:49:01 AM Sep 08 2008

      Report This!

      Some well pointed tips on acquiring and managing venture capital.

      pakala 03:40:52 PM Sep 07 2008

      Report This!

      One of the key reasons for the Cate Blanchett scenario is that people think banks are something they are not. Part of the problem is bank advertizing that makes the bank look like it wants to "invest" in your business or the community. That couldn't be farther from the truth. In business terms the word "invest" means there is risk involved. Banks are in the business of downwardly managing risk. They don't take risks. Banks "rent" money; they don't "invest" it. When you rent out something, you only do so when you fully expect to have it returned. As a general rule, banks only put our money when they know they will get it back in a reasoable time. No risk. Banks only get a set rate of interest and that rate is the lowest rate you'll find from any lender. Low rate = low risk. Investors on the other hand know they might not get their all their money back, but the trade-off is that if the venture is successful, they'll get a big return. High risk = high return. It's all about

      cuttlefish2170 10:49:26 AM Sep 07 2008

      Report This!

      We need more Private investors, not VC,Angel, ect... People that have $ and want to make more. Where are you all?

      1 - 10 of 13
      13 comments

      Add your own Comments

      Clear
      Add

      The Startup

      The Startup

      The Startup, the web's premiere online reality show for small business owners, is back for its third season! Watch as we follow four entrepreneurs to see how they're making their businesses come to life.

      1. The Startup

        Small Business Checklists

        It can be difficult to keep up with all the details involved in running a small business. Don't lose track of the details -- use a checklist to keep yourself organized.

        1. Checklist: Starting a Business
        2. Checklist: Closing a Business
        3. Index of Small Business Checklists

          Small Business Success Stories

          1. More Than Moonlighting
          2. Reality TV Leads to Small Biz Success
          3. From Couple to Business Partners
          4. Build-A-Bear's Founder Shares Her Story

            Helpful Resources

              AOL Coaches

              Jake Steinfeld

              Business Coaches
              Starting your own business can be a daunting task. With AOL's Small Business Coaches, you can get the best advice to guide you through the process.