There’s a lot of information out there about what not to do when raising money for your startup. I’ve stressed before the importance of researching investors before contacting them, understanding factors like seasonality which can increase the length of your fundraise, and avoiding cold emails in order to get a better response from your target prospect. Other tips include not posting controversial content, being too salesy, overestimating your market opportunity, or saying there’s no competition.
But there’s more. In addition to the above, there are a number of major red flags I see that often scare away potential investors. By being aware of and avoiding the five major fundraising don’ts below, you’ll be better positioned for a successful fundraise and growth of your company going forward.
1. Paying off debt
When you’re ready to seek outside capital from investors, you should have figured out the business model and be able to clearly articulate how you’ll use the investment to supercharge your company’s growth. In other words, the capital should ideally not be used for paying off debt. While you may have incurred debt to get the business where it is today, most investors want to know their capital is being used to invest in the growth of the business to increase its future value. On some occasions a new investor may want to “clean up the cap table” and acquire equity from early investors, but most new investors want their money going towards things like new hires, technology spend, and marketing campaigns, not paying off debt.
2. Enlisting bankers to conduct the raise
At the earliest stages of a company, angel investors rarely see bankers involved in raising capital on behalf of the startup. In fact, many angel groups strictly prohibit the involvement of bankers in their deals. Because the amount of the raise is usually relatively small in the beginning, investors don’t want some of the proceeds going to an intermediary when it could all go towards the company’s growth. Plus, early stage investors like to see you take responsibility for company processes like fundraising since you as the founder are the driving force behind the company, and they want to form a relationship with you directly in the process.
3. Paying for legal issues
If you or your company are a target of current or past litigation, this can be a point of contention for investors. Again, investors want to know that any capital they invest in the company is growing towards the growth of the business, not towards costly legal bills. They also don’t want you spending your time fighting legal battles instead of running the company. Legal issues can also be a red flag about the way the company does business with respect to employee relations or competitive conflicts, so you’re better off resolving any outstanding issues before beginning a fundraise.
4. Excessively high salaries
Investors do not like it when you propose to pay yourself an excessively high salary. The amount may vary by role and location, but in the earliest stages, I often see fellow investors raising eyebrows when they see an individual salary of over $100,000 per year. Of course, sometimes those numbers can be justified if it is an extremely seasoned executive and if it still represents a substantial cut from their previous compensation; however, most investors want the entrepreneurs to have as much “skin in the game” as possible so that they are aligned in wanting the equity to appreciate while directing as much cash as possible to finance the growth needs of the business.
5. Unnecessary buzzwords
When I hear too many buzzwords or unnecessary terminology from an entrepreneur (e.g. “hustler,” “guru,” “hacker,” etc.), I become cautious, especially because it may come across as inauthentic if it’s not natural to you. Most investors I know don’t have “ninja” on their short list of “must-haves” in an entrepreneur. If you present your business in a clear, concise and compelling way, you don’t need to echo the herd in repeating jargon. The best entrepreneurs don’t come across as too eager to impress; they stand on their own merits.
There you have it — more fundraising don’ts to avoid. Remember that active investors see hundreds — if not thousands — of pitches in any given year. It’s tough to pick among so many great entrepreneurs, but sometimes saying ‘no‘ is obvious. You may have great intentions, but if you do one of the above things, it’s can be a big red flag to investors and cause them to direct their attention elsewhere.
So take heed, and good luck with your fundraise!
