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Raising cash for your startup? Here are five common mistakes to avoid

Two businesspeople on a ship

Startup founders often grapple with an expertise gap on their leadership team when it comes to raising capital.

Many seek out a virtual CFO when they are running short on cash. But as a result, I am often presented with the challenge – frequently within the first meeting – of helping businesses secure a loan or raise capital before their runway drops off (which is most often within three to six months).

I’ve been working as a CFO for more than 15 years. Time and again, I sit down with a client and they ask me to deliver what they want rather than what they need.

Henry Ford put it best when he said, “If I had asked people what they wanted, they would have said faster horses.”

Just because you can attract angel funding or a startup loan based on an idea does not prove that your business is prepared for the treadmill of responsibility that is continuous fundraising.

If CEOs want to ensure their business can reach its potential, then more preparation is required up front to ensure a sustainable future for years to come.

Here are five common pitfalls to avoid in the startup stage:

1) Assuming you have product market fit

It can take years for companies to nail product market fit if it isn’t a priority from the outset. Many tech companies fail at creating a customer-centric solution out of the gate because they focus on features rather than solutions. The product may pivot several times before it addresses the right need with the right solution.

Ideally, this can be sorted out before coding begins. Measure twice and cut once by getting potential clients to validate in advance that they would indeed pay for the product you intend to build.

2) Rushing to market

Tech firms founded by engineers are not immune to the human tendency to expect product development to be completed sooner than is realistically achievable.

I see this more often than you might think, where R&D falls short of its deadlines. While this isn’t a groundbreaking revelation, the cause for the frequent shortcomings is sometimes surprising.

In many cases, founders or executives set unrealistic expectations in the hopes of meeting deadlines set to satisfy funding stakeholders. An unfortunate side effect of this oversight is that companies will spend the first few years of operating playing catch up, trying to account for unmet customer expectations.

3) Overvaluing the “need” for your solution

There are some examples of very successful products that satisfy wants, like the so-called hoverboards that have risen to popularity in recent years. And in some cases, products can be so game changing that they become a need, as we’ve seen with smartphones.

But it is much easier to accelerate sales of a product if it truly addresses a pain point for consumers. Products that cater to wants have the increased marketing challenge of needing to convince individuals that they are deserving of satisfying their wants – an argument that’s typically subject to harsh buyer scrutiny.

4) Generalizing your product’s application

Most products are not suitable for everyone, yet overzealous founders often believe that the whole world will want what they’re selling.

In early stages, startups often don’t apply critical thought or research to determining the customer personas that their solution will appeal to the most. Typically, this results in two undesirable things. Companies spend money adding irrelevant features to broaden the product’s application and are forced to deploy less impactful marketing campaigns in order to reach a wider – but less appropriate – audience.

5) Expecting overnight success

“Build it and they will come” is entirely inapplicable when it comes to tech.

Even the most amazing creations can take time to sell in volumes. International best-selling novel The Alchemist, by Paulo Coelho, has been translated into 70 languages since its original 1998 release. In the first six months after publication, it only sold two copies.

Plan responsibly for customer adoption based on industry standard expectations. Do not bank on your product being an overnight phenomenon.

In order to succeed in the startup space, founders and executives must challenge their default expectations and be prudent in setting their priorities early on.

This will increase the likelihood of meeting your projections and have a trickle down effect for future endeavours. Angel investors will be more likely to reinvest, BDC will be more likely to provide a second loan sooner and the company will be better positioned for series-A and series-B funding.

Susan Richards is the co-founder of numbercrunch, a one-stop-shop for accounting support and advisory services. Comprised of CFOs, Controllers and Bookkeepers, the company leverages the latest in cloud accounting technologies .

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