Common myths about raising capital
Shows like Shark Tank and Silicon Valley have glamourised the entrepreneurial journey, with one of the commonly believed tropes being that successful startups need to raise money from venture capital. Having met and worked with hundreds of entrepreneurs at different stages, here are some common misconceptions I hear around raising capital.
Myth 1: Venture capital is the only source of funding
Venture capital funding suits only a small percentage of companies. Venture capital investors are usually looking for the most disruptive companies that will give them 10x (usually) returns.
Depending on your venture and the stage you’re at, there are other funding options including angel investors, venture debt and grants. The best source of funding is, of course, through your customers, in the form of revenue.
Myth 2: All investors are looking for the same thing in a company
Investors have varying investment theses and preferences — from the industry category the company is in, the stage of the business, and whether they have the expertise or network that can help this business, just to name a few.
For example, there are investors who only ever invest in companies that decarbonise the planet, while others who only invest when there’s strong recurring revenue.
Myth 3: Raising capital is a quick process
The timeframe between when you start searching for funding to when the money hits the bank is longer than most people expect. Building relationships with potential investors, negotiating terms and completing due diligence can be a lengthy process, often taking months before the startup sees the money.
Myth 4: Investors will sign a cheque based on my pitch alone
What you don’t see in shows like Shark Tank is the due diligence process. The five minute pitch serves as an introduction for the investors to create sufficient interest to allow you to engage them in a series of longer conversations. If they’re interested in your pitch, they’ll be asking deeper questions to understand you and your company, before negotiating a term sheet.
Myth 5: I should take money from any investor who offers it
Selecting the right investors is crucial. A company taking on investors is a bit like entering into a marriage — working together to grow the company, you’ll be sharing the ups and downs together in that journey, and you both need to be committed to working together to figure things out, when hard times arise.
You should be reference-checking every investor you take on board, and should be confident that you can work with each other moving forward.
There are many horror stories of companies taking on mismatched investors only to create lots of headaches down the track.
Myth 6: I need to give up control of my company to secure funding
Giving up equity doesn’t necessarily mean giving up control.
Some investors would like to have stronger involvement in the direction of the company, and will negotiate a board position. Most of the time, investors back companies because they believe that the founders are pursuing a great business opportunity and that they have what it takes to create a successful company. Very rarely will they want to run the company for you.
What are your experiences with raising capital that were surprising or unexpected? Share them with us!
