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 around raising capital.
Myth 1: Venture capital is the only source of funding.
Venture capital funding suits a small percentage of companies that are in the ecosystem. Venture capital investors are often looking for the most disruptive companies that will give them huge (10x or more) 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.
Myth 2: All investors are looking for the same thing in a company.
Investors have varying investment theses and preferences - from industry 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 and 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 money in the bank.
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 and negotiation process. The 5 minute pitch typically serves as an introduction for the investors to draw them into a longer conversation. If they're interested, they'll be asking deeper questions to understand you and your company, before negotiating a termsheet.
Myth 5: I should take money from any investor who offers it.
Selecting the right investors is crucial.
A popular analogy is that companies taking on investors is like a marriage. You're working together to grow the company and will be sharing the ups and downs together in that journey.
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 the mismatched investors only to experience lots of headaches down the track.
Myth 6: I need to give up control of my company to secure funding.
Giving up equity does not 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 founder has pursuing a great business opportunity and has what it takes to be
successful company. Very rarely will they want to run the company for you.
Raising capital can be an exciting and daunting process, even for those who have done it before. If you’re doing this process, come and have a chat with us.
