The Seven Most Common Financing Mistakes
As a serial entrepreneur and a former venture capitalist and angel investor, I've been on both sides of the table during a lot of financing pitches (see BusinessWeek.com, 1/22/07 "Rules for Raising Capital"), and I've seen entrepreneurs make the following seven mistakes over and over. Don't shoot yourself in the foot by repeating them—getting financing is hard enough as it is.
Mistake No. 1 One of the most common mistakes entrepreneurs make is to believe their company is the only one that has the phenomenal, earth-shattering idea that they built their business plan around. They carry this belief right into the financing pitch session (see BusinessWeek.com, 2/20/07, "Make Your Financing Pitch Sizzle").
When you identify something missing in this world and you determine what the "pain" is surrounding it, you're potentially in the money. But chances are someone else has thought of your idea, too. Remember that according to copyright law you can't protect the idea itself—you can only protect the expression of the idea. Acknowledge that you might not be the only company that has thought of it and make sure to identify your potential competition. Think outside of the traditional market. Look far out on the horizon to determine where your competition might come from. Your idea might not be unique, but if you create and execute a solid business plan, you'll be ahead of the pack.
Mistake No. 2 Another common mistake entrepreneurs make in a financing pitch is to try to become friends with the financier. Financiers are business people whose primary responsibility is to help their clients make money. They are as successful as the investments they make on behalf of their clients. Dispense with the kissing up and excessive schmoozing and make sure you've got the numbers and a solid strategy for execution that will wow them.
Mistake No. 3 Don't give financiers everything at once. Qualify situations and the people you choose to share your business plan with. The business plan should speak not only of your idea, but also of how you will capitalize on it. The heart of it is your execution plan. And execution is what will make or break your company. Protect yourself by ensuring your execution plan doesn't get into unscrupulous hands. Number each copy you hand out in the footer of the document and track them.
Mistake No. 4 A common mistake is to overstate your financial projections by miscalculating market size, how long it takes to actually get a product developed and launched, and the length of the sales cycle. I have seen entrepreneurs get very enthusiastic about a product or service idea, but neglect to dig into how many people will actually want to buy it. Are you making a nice-to-have or a must-have? Your financial projections should reflect this. Be careful before claiming something overblown like "The market size for our widget is five gazillion people because everyone needs one!" While investors are occasionally fooled by numbers over the short term, the company itself is the one that almost always takes the hit over the long term. Tight budgets and realistic projections may lengthen your process for getting funding, because they're not as flashy and initially impressive. But when you close your financing, it will be based on what you realistically think you can achieve and your financiers will ultimately respect you for this.
Mistake No. 5 Once an entrepreneur identifies a revenue stream, many dream their company will be on an easy path to profitability. But it is a mistake to assume that when you book a customer's order, you will also be able to book the revenue. Be sure that your chief financial officer stays on top of the latest in revenue recognition and keeps an eye on your DSO number ("days' sales outstanding," meaning how long it takes to collect payment from customers).
Spending too quickly based on orders gets a lot of businesses into a cash flow problem. But a little foresight, planning, and discretionary use of funds can go a long way. Entrepreneurs who treat their budgets with the same meticulous care as their product development are the ones who survive and eventually thrive.
Mistake No. 6 Another tricky part about growing a company is having a staffing plan that makes sense (see BusinessWeek.com, 4/24/06, "When to Say, 'You're Hired!' "). Do you hire when you need people and can cost-justify them, or when you can see the need in the near future? It's best to have a core group of full-time employees plus a stable of part-time contractors. Have people in the hopper as well—you should always be networking, keeping a list of people you may want to hire. There are certain folks you'll hire "as needed," such as salespeople (see BusinessWeek.com, 6/23/06, "How to Understand Your Sales Force"). Every employee has a ramp-up time, too. I've never seen a sales person ramp up faster than 60 days. That's how long it takes to get trained on product features/benefits and to get on target for one's quota. Some members of your staff will need to be hired up-front, such as software developers (if you aren't outsourcing). Consider virtual staff and telecommuting to keep your office-space needs smaller.
Mistake No. 7 Here's something that most companies might not see as a mistake: bringing in unnecessary partners. There are certain partners who are essential to your business, such as funding partners. But you must justify each partnership: Each should bring some value that can be articulated. I remember seeing a deal come across my desk one day when I was a venture capitalist. It was for a company that partnered with other security software vendors. But when we looked at the multitude of partners they had, alarm bells went off because some of the partners didn't make sense. They were just "fillers," who served no apparent purpose. Meaningless partnerships are time-consuming—and a liability. When an entrepreneur lists too many partnerships, with too little tangible payoff, financiers start to wonder what else they're wasting time and money on. Qualify your partners and articulate a business reason to have an alliance with them. Make sure your offerings are complementary. Your plan should state how you are going to co-market or co-sell and what the financial incentives are for each party.
Made (or witnessed) your share of financing mistakes? E-mail me and let me know the blunder you wouldn't want to repeat or wish on anyone.