Andrew Thomas is a co-founder of SkyBell -- a smart home security company that is making homes and neighborhoods safer with a video doorbell that lets users answer their door from a smartphone -- starting with the SkyBell Video Doorbell.
Ready to raise? Excellent. Fundraising for your startup is equal parts thrilling and challenging.
Your approach to fundraising will have a huge impact on your success and, more importantly, your ability to attract the right investor. One way to prepare for your pitch is to learn the common mistakes that founders make while raising early rounds of capital -- and how to avoid them.
I learned these lessons from mistakes I personally made while raising millions for SkyBell, a Wi-Fi video doorbell startup I co-founded two years ago, as well as from the most common feedback I hear while speaking with other founders and investors. Raising money is not easy, but this list can help put you one step ahead.
Mistake #1: Prioritizing Money Over the Right Investor
Instead of focusing on the check size, focus on the investors. Ask them about their experience and expertise. Find out what they can do for you beyond money. Are they experienced and connected in your industry? Can they bring strategic value and help open doors? Most importantly, do you like them?
Remember, you'll be chained to these investors for a long time. You want investors who add value, won't be afraid to challenge you and will support you during the inevitable rough patches. It is always better to take less money or agree to a lower valuation with the right partner than to accept more money from the wrong investor.
Mistake #2: Over-valuing Your Valuation
Many founders focus too much on getting the highest valuation for the investment. We've all heard it before: "Dilution is a bad thing." You know what's worse than dilution? Going out of business because you didn't raise money. Instead, focus on getting a fair deal with the right investor.
Over-valuing your startup causes multiple issues. At best, it will create opposition to a deal and could eliminate a value-added investor. At worst, it can signal to the investor that you are detached from the market and reality. The first is a tactical mistake. The second is a "you" problem. Investors don't invest in founders they don't trust or respect.
Go beyond the valuation, and focus on finding the right partner and on what you can create together. Determine an "ideal" valuation and an "acceptable" valuation that is more flexible. It's OK to settle for the lower amount if it's with a value-added investor you like. During valuation conversations, ask the investor questions about how they can help you create move value in the future.
Mistake #3: Focusing Too Much on Numbers
Investors need more than just your balance sheet. Put as much emphasis on your story and vision as you do on your numbers. Too many times founders parade numbers, charts and metrics without a narrative that is supported by those numbers.
Remember, people buy based on emotion, and they justify that decision with facts and the rational mind. Instead of getting lost in the numbers, elicit an emotional connection by leading with your vision and mission statement. Then show how your numbers and metrics demonstrate your ability to execute your vision and validate the idea.
Mistake #4: Putting All Your Eggs in One Basket
Many founders stop the pitching process once they receive the first term sheet, but this leaves you vulnerable to the investor backing out. If that happens, you'll be at risk of running out of money or making desperate decisions to stay afloat.
To avoid this issue, continue the process of meeting new investors while you work with the first group. Things can happen at any time. Investors can back out or change their minds. Money can magically freeze up. Markets can drop. Protect yourself by continuing to pitch investors until one group closes the deal.
Mistake #5: Raising Money Without Runway
Fundraising can take months, and you don't want to run out of money during the process. This puts you in a bad negotiating position, and it may also lead to impulsive decision-making. Investors will complete due diligence and see your financial documents. Your desperation could lead an investor to negotiate harder on pricing and terms -- or decline altogether. Your desperation may lead you to accept less favorable terms right away instead of waiting to meet more investors and find the best one.
Work with your CFO and budget a conservative runway based on your cash flow and burn rate. Start the official fundraising process four to five months of leeway. You'll be in a much better position.
Mistake #6: Waiting for the Next Big Milestone
There will always be an enticing milestone in your future that will bolster your valuation. While it makes sense to wait until you reach it in order to raise at a higher valuation, this is very risky. There is always a chance that something can fall through, and then you're left without the milestone or the funds needed to keep going. In that case, you would need to stop your progress and shift your focus from your business to raising money.
Raise money before you need it, even at a lower valuation. You want that money to be available so you can continue growing your business and creating more milestones to reach. The money you leave on the table can be recouped with rapid growth.
Mistake #7: Only Looking at Venture Capitalists
There are many viable alternatives to venture capitalists (VCs) for investment. First, non-institutional investors like angels and family offices might be more flexible with terms and will likely be able to close a deal faster than a VC. You can also look at notable incubators as a source of funding and mentorship. In the Valley, 500 startups, Y Combinator and Highway1 are great places to start. Also, consider strategic investors. They too can move quickly and will provide value beyond just the money itself.
Another track to funding includes crowdfunding sites, like Indiegogo and Kickstarter, and crowdsourced funding sites like AngelList. The former is more geared toward hardware startups and should be regarded as pre-sale revenue, not investment funds. AngelList is an online community of credited investors that invest in your startup as a syndicate.
Investors see hundreds of founders and pitches, and they can spot red flags from a mile away. Learn from these mistakes, and you'll have a much better chance for success. Good luck!