3 common fundraising mistakes (and how to avoid them)
Let’s improve your chances of success
I’ve had the chance to be a part of dozens, maybe hundreds, of “fundraising” requests — and it’s always funny to see how clueless most are with this process.
I don’t say that to be mean either, I’m just trying to show you what happens behind the scenes, and it’s almost impossible to actually raise funds when investors (or banks) can see you’re making “amateur” mistakes.
The trust is immediately gone, and no amount of “hustle” will overcome that.
Most think they just need to “reach out more”, finally finding an investor that “understands” them, doesn’t quite work that way.
Instead, you need to dig in and understand why people are saying “no” in the first place, which generally revolves around the 3 mistakes I’m about to mention.
Has nothing to do with:
- Pitch deck design
- Market conditions
- Or anything like that…
Because for the most part, it’s something that happens “underneath” the surface.
You essentially have to speak “investor-nease”, being able to put items in a way that makes sense to them, and I’m not talking about fancy “ratios” either.
Those are reserved for the corporate world, in SMB, it revolves a little more around “common sense”.
This applies to both investor relations, and bank relations, as I’ve worked with both.
Actually used to be a Commercial Loan Officer back in the day, where I was the guy “new” business owners would reach out to, having to analyze their “business plan” because of it.
Have yet to see a “great” one, but if you address the mistakes I’m about to show, then you’ll be ahead of most others.
Not saying this is going to be an “all-inclusive” guide, but I am saying the logic we’re about to discuss typically impacts every aspect of your business overall.
Get them right, and most other things fall into place, so I’ll be tailoring this article more towards the “pre-revenue” crowd.
Even if you’re ahead of that stage, all these will still be applicable to you, but I want to start with “worst case scenario” — that way it applies to everybody.
Seeing this, let’s get into the good stuff now, starting with:
Mistake #1 — Not creating “bottom-up” projections
When it comes to creating “bottom-up” projections, I don’t know if this is a technical term a lot of people use, but it’s how I’ve always looked at everything.
It makes sense when you understand the logic, so for starters, most “projections” have no “meat” underneath them.
To give you a simple example of this, years ago, we had the “owner” of a potential Cajun Restaurant reach out to our bank.
He was a member of the Air Force, stationed at a base in my city, and felt like he needed to bring “Cajun food” to the area.
Pretty sure he was from Louisiana as well, so it’d be authentic, but they sent us projections and it was almost an instant “no”.
Not necessarily because the business idea was bad, but because he’d clearly put zero thought into it.
Wish I could remember the exact numbers now, but I know top-line revenues were high, saying something along the lines of:
“In year 1, we’ll make $800K”
“In year 2, we’ll make $1.2M”
Etc…
And then when we asked how they came up with those numbers, the answer was depressing.
Had to do with the typical:
“Well, there’s 1 million people in this city, so we figure if we can get 1% at $20/person — that equals X amount”…
Which is just straight-up terrible.
I’ve heard Mark Cuban mention this in interviews as well, but one of the dumbest things you can do is talk about “if we can just get a small percentage of the market”.
People don’t quite work like that, there’s always an “alpha” that dominates every field, and there’s no “rationale” behind this approach either.
Just because you put up a restaurant, doesn’t mean you’re going to attract a certain percentage of market opportunity, for all we know it could be way less.
That’s the start of it, but whenever you’re creating any type of “top-line” projections, we always want to see a lot of detail underneath.
For example, in this guy’s case, the first thing I would’ve liked to see was “cost of goods sold” (COGS).
He didn’t do any research on this, but it’s extremely important to start looking up distributors first, and get a general feel for how much your “supplies” are going to cost.
If you can see you’ll be able to get “10 lbs of rice” for $10, that’s a great start, as it helps us have some realistic projections in place.
Once this is all figured out, the next thing he would’ve needed to calculate was his menu items.
What “products” was he going to sell, and from there, how much quantity would go into each item.
After that, we’d have a good idea on his COGS, which would then allow us to start formulating price.
If the standard COGS for each meal was $25, he’d likely need to charge $50 just to stay afloat, that’s a concerning red flag already.
The average customer doesn’t like to spend $50 on a plate of food, meaning that at best, his “traffic” would be smaller because of it.
Not saying this is an automatic disqualifier, just saying it helps you formulate everything else, as you begin to realize you won’t be attracting the “masses”.
Anyway, that’s the start of it, but then you need to get granular and produce some “realistic” traffic projections.
In the restaurant industry, you’re always going to have more tables on Saturday, then you would on Tuesday — unless you “artificially” increase this.
Maybe you do some form of “BOGO” on Tuesdays, which is fine, but the “discount” needs to be accounted for in overall profits.
Seeing that, this is what he’d need to figure out next, and I’d like to see a little bit of “logic” here as well.
In some situations, it can be difficult, but creativity (and hustle) makes anything possible.
Who knows, maybe he sits outside of the nearest restaurant for a week straight, counting all the people that go in there.
That might be an “extreme” example, but it gives you a general idea of what I’m saying.
Sometimes you can reach out to the owners nearby directly, asking if they can provide the numbers, sometimes you can rely on outside research — there’s always a way to at least put some “logic” behind these assumptions.
Knowing that, this is what he’d have to do here, then finally create the “actual” projections after that.
When you can be like:
“Okay, on Saturday it’s safe to assume we’ll get 50 people, and our average menu item is $20.
That creates revenue of $1,000 this day, with a COGS of $500”…
Then it helps us create a lot more “realistic” projections.
Since we’re working from the “bottom-up”, there’s always logic underneath the actual numbers, and that naturally makes investors (or bankers) trust you more.
If they can see “how” you reached these projections, and have a hard time arguing with the logic, then your chances of success immediately increase.
It’s hard to say no to something that just “makes sense”, so even though it takes more work upfront, it drastically improves the chances of you achieving your goal because of it.
Kind of how life works, especially when 99% of “aspiring entrepreneurs” try to take the simple route, so that’s the first thing to consider.
By itself, I’d say this alone fixes the majority of problems, as I don’t know if I’ve ever seen anybody proactively do this.
Don’t get me wrong, I’ve helped companies with this approach, and got quicker funding because of it (largest was $5M) — but I’m just saying it’s a way for you to naturally stand out.
Less than 10% of “applicants” go into this level of detail, putting you in a great position already, and then we have:
Mistake #2 — Not validating a “product-market” fit
This mistake is going to be more geared to the “new” crowd, but it’s something that also impacts “existing” businesses as well.
To give you a couple examples of what I’m saying, years ago, I had this “tech entrepreneur” reach out to me.
The guy built a SaaS tool years before this point, and after getting a little traction, he wanted to receive funding and “accelerate his growth”.
At the surface, it seemed like a fun deal, but then I dug into it and realized there was a lot more work that needed to take place.
In his case, he almost had a “false sense” of product-market fit.
I really wish I could remember the exact product he was selling as well, it’s been awhile, but I know it had something to do with YouTube.
Pretty sure it allowed people to make notes (on the video) when they were watching it, as teachers were one of his biggest markets, mainly because they bought it for their students.
Seeing that, he knew he was onto something, but the pricing and target market was a little off.
Think he was selling this tool for a $10 “lifetime” subscription, meaning they paid $10 once, then had lifetime access after that.
Very hard to build a business with that number, so what I advised instead was to package everything differently and try to get a better “product-market” fit that way.
The initial plan was maybe selling “annual licenses” to schools, trying for $1K, that way his profits were larger.
It made a lot of “sense” to him, but he didn’t have the energy (or commitment) to try it out, so he essentially just let his dream die after that.
Not saying this to be depressing, just saying this because in a lot of scenarios, existing business owners can have a “false” form of product-market fit.
Just because somebody paid “$10” for your offer, doesn’t mean they’ll pay $1K, so you want to have some validation in the form of an actual “business” model.
Investors (or bankers) want to see you sell the “ideal scenario” at least 3 times, that way they know there’s potential, and you just need outside funding to “scale” it.
That’s the general logic with existing businesses, and the same thing applies to “pre-revenue” entities, although it’ll be more creative.
There’s many ways to do this, but one of my favorite examples is when Jon Taffer sold “discounted gift cards” to open a new bar.
Think he did something along the lines of:
“Buy a $50 gift card for $25, and use when my new bar opens”…
Which was enough for him to fund the entire “startup” of his new restaurant.
That’s one way to use this, but even if you don’t want to go that extreme, you can still apply these principles and find a “product-market” fit.
If you spent $200 on Facebook Ads, trying to sell gift cards for your “upcoming Cajun Restaurant”, it’ll give you the data necessary to “prove” there’s people interested.
Assuming you can sell a few, that validates the demand for “Cajun food” in your area, helping investors (or bankers) become more comfortable with it.
Again, it all comes back to creating an argument that’s hard to disagree with.
If an investor said:
“We just don’t think there’s demand for Cajun food in your city”…
And you said:
“Well, we actually sold 100 gift cards, with $500 of ad spend”…
That’s going to make them reconsider this belief.
Hard not to, and this is only what happens when there’s not a lot of “comparables” for your specific situation.
If there was a Cajun restaurant 100 miles away, taking place in the same-sized city, then you could use them as an example and “validate” demand that way.
At the end of the day, every situation is going to be different, but you need to address this no matter what.
Product-market fit is a HUGE concern for every investor or banker, primarily because most businesses try to sell something people don’t want.
In addition to that, a lot of business owners try to sell a “me too” product, where they replicate the success of others — and that actually brings me to my last point:
Mistake #3 — Competitor (and industry) analysis
With this mistake, it’s something few consider, and for the ones who do account for it — they always have the “worst” response possible.
To give you an example of this, I remember hearing an “aspiring” entrepreneur address this question years ago, where they talked about how they don’t have competition — as they’re “cutting-edge”.
In other words, they’re the first to do it, which is concerning by itself.
When you’re the ONLY one doing something, that generally means there’s not a market, but at the same time — there’s never a case where you have “zero” competition either.
If anything, you need to quit looking at everything so linear, and Uber would be a decent example of this.
In their case, they were the first to provide “ride-sharing” services, but it’s not like they didn’t have any competition either.
Their direct competitors were taxi cabs, who had the luxury of “familiarity”.
When people are familiar with something, they tend to gravitate towards that option, unless you can give them a really good reason not to.
Seeing that, when creating this part of your “pitch deck”, you need to analyze your competition and answer the question of “why me”.
Are you cheaper?
Are you faster?
Are you closer to their home?
Etc…
There’s a gazillion different answers for this, but at the end of the day, the best answer is always because you’re able to solve a “problem” that comes with your competition.
To provide a “well-known” case where this happened, I like to look at Target.
In their scenario, they were competing with Wal-Mart, who’d essentially dominated the “low-cost” retail space.
It’d be nearly impossible to survive if you were like:
“Hey, we’re low price too”…
Mainly because everybody was already familiar with Wal-Mart.
They’d already “planted their flag”, so what Target did instead, was found the main problem with Wal-Mart and “capitalized” on it.
Even though they didn’t say it explicitly, their unique selling proposition (USP) was:
“We’re still a discounted retailer, so you’ll enjoy cheap rates, but we’ve eliminated the chaos that goes into shopping at Wal-Mart”…
Building a very good company because of it.
I actually used to work at Target way back in the day, and I remember how much of an “emphasis” they had on this.
My main role was “Front End Supervisor”, and every time there were more than 2 people in line, I was supposed to call for backup.
They didn’t want anybody waiting in line too long, something they’ve gotten worse about over the years, but it gives you a general overview either way.
When it comes to competitor analysis, you need to acknowledge your competition, and show why people will choose you over them.
This doesn’t mean you need to win EVERYBODY over either, there’s still a lot of people who shop at Wal-Mart as they want the lowest price possible, but you need to attract enough clientele to have a profitable business.
Assuming you can solve a specific problem with the competition, then that generally works, and you also have to consider “industry” analysis on top of that.
For the most part, this overlaps with competitor analysis, even though I personally like to think about it separately.
Helps me see the “risks” from multiple angles, and in the event of industry analysis, you want to think about what’s going to happen with your industry (as a whole) in the upcoming years.
To give you a simple example of this, back in the day, I had to underwrite a loan request from this “paper supply” company.
They’d been around for a long time, but needed to make some changes with their equipment, so they requested a fairly large loan.
You could tell they were almost “oblivious” about their industry conditions as well, because even though they had declining revenues for 3 years straight, they just kind of “shrugged it off” as a fluke.
“Businesses will always need paper, so we’re not worried about it”…
Even though it was clear the demand for this would be going down, especially with the rise of technology.
This was back in 2013, when “electronic signing” wasn’t as prominent, but we declined their loan mainly because they wouldn’t acknowledge this.
They thought 2015 was going to be the same as 1995, obviously not the case, so you want to acknowledge risks and give “mitigating factors” to ease the nerves of investors (or bankers).
If they would’ve been like:
“Yes, we realize businesses will be using less paper as the years go by.
The rise of technology is inevitable, decreasing paper because of it, but we’ve also found that more marketing agencies are starting to use direct mail.
Now that everybody is online, direct mail is becoming more prominent for certain markets, so we’re targeting more agencies now — and actually increasing this line of our business along the way”…
Then their chances of success would’ve been much higher, as we would’ve seen they’re “pragmatic”.
As with everything, each scenario is going to be different, but you want to do this with your industry.
I don’t care what field you’re in, there’s always risks, so keep this in mind when creating your “pitch deck”.
Investors (and bankers) love “pragmatic optimists”, so when you’re able to identify upcoming risks, along with a plan to mitigate those risks — that goes a long way.
Anyway, that’s it for mistake #3, which takes us to:
The recap
Long story short, even though these corrections won’t fix every issue business owners run into with funding, it’ll certainly get you ahead of most.
In addition to that, when you truly understand the “logic” behind all of these corrections, you’ll start to see how they apply to every aspect of funding as well.
Investors (or bankers) love “certainty”, and even though it’s impossible to guarantee 100% certainty, a little bit of extra work can get you very close.
Simply need to:
- Create projections that are built on realistic assumptions
- Validate demand
- Mitigate risks…
And if you do all this correctly, your chances of receiving funding is much higher, allowing you to build (or scale) a company because of it.
Hope this helps,
-Sean
