Misconceptions About Startup Funding |10 Most Common Misconceptions to Avoid

Business success requires ambition, dedication and a lot of perseverance. The main ingredient, however, is money which ultimately makes a business sustainable. Funding a startup business is easier than people believe. This is mainly due to the many misconceptions that float around about what funding really means for a business and how it can be sourced. The reality is that what many entrepreneurs believe to be sound logic, may actually be harmful and hurtful to their businesses.

Funding refers to the money required to start and run a business. It is a financial investment in a company for product development, manufacturing, expansion, sales & marketing, office spaces and inventory. It can come from a variety of sources and is used for a business from the ideation stage to a fully functional and profitable entity.

Misconceptions About Getting Funding

• Depending on Existing Network
• Not Investing in Creating Professional Marketing Collateral
• Underestimating the Timeline of the Funding
• Focusing Exclusively on Partnering
• Need for More Data
• Being in Stealth Mode
• In Due Diligence With a Venture Capitalist
• Exclusive Focus on One Category of Investor
• Not Interested in Speaking With the Associate-Level Staff
• Issues Around Focus and Organisation
• Depending on Banks to Avoid Diluting Equity

Misconceptions About Getting Funding

Depending on Existing Network

While the existing network of friends and family and a few professional connects might be enough to raise the initial seed capital to launch a business, it is by no means enough once the business gets off the ground and begins to grow. Fundraising is an enormous undertaking and an entrepreneur needs as many connections with investors as possible. It is important, therefore, to invest in networking to expand the connection pool.

Not Investing in Creating Professional Marketing Collateral

Investors receive thousands of unsolicited business plans annually, requesting funding. A company looking to interest investors in a round of funding must effectively and succinctly be able to convey the value that sets the business apart through thoughtfully conceived marketing material. A business requires an attractive marketing campaign to receive good investors.

Underestimating the Timeline of the Funding

The process of finding the right investors and going through the due diligence process can take up to a year or even more. Hence, an entrepreneur looking for funding must take into account at least 12 months before the funding goals are fulfilled. This requires diligent planning of business operations.

Focusing Exclusively on Partnering

The funding route may make it necessary to offer equity in the business to investors. New entrepreneurs wrongly assume this move to be an effort of a takeover. This makes them defensive and offer only an asset partnership to investors. This is a counter-intuitive move as it limits the number of investors to receive funding.

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Need for More Data

The first thing to do with investors is to open a line of communication. Hence, ‘when’ becomes more important than ‘what’ to say. It is prudent to arrive at the crux of the issue as soon as possible. If the investors need to see more data, they will ask for it. It is necessary, at the foremost, to show them the product or service that requires funding.

Being in Stealth Mode

The fear that the idea can be stolen can prevent the business from showcasing the invention in the first place. To grab the interest of the investors, the product needs to be showcased to highlight the value proposition in investing in the business.

In Due Diligence With a Venture Capitalist

Fundraising is a numbers game and most companies fail the due diligence processes and do not succeed in procuring funding. This is hardly the reason, though, to stop looking for investors or give up. This should, in fact, lead to double efforts towards funding.

Exclusive Focus on One Category of Investor

It isn’t wise to be selective before having options. The entrepreneur must scour the market, understand all the options for fundraising and cast a wide net to attract investors.

Not Interested in Speaking With the Associate-Level Staff

The associate-level staff are, essentially, the gatekeepers of the industry. It is wise to understand that most executives act based on the reports of the associate-level staff. It is in the entrepreneur’s interest to keep up a good relationship and healthy communication with them as they could be the pathway for the funding.

Issues Around Focus and Organisation

The process of fundraising is overwhelming. Colour-coded spreadsheets aren’t enough to organise and present all the information. The business would be wise to invest a small sum in the right cloud infrastructure to drive its campaign.  

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Depending on Banks to Avoid Diluting Equity

While it is true that banks are great non-equity partners, they rarely take the risk of investing with a startup without collateral or personal guarantee. They have very strict covenants with a monthly payment guarantee.

Conclusion

Contrary to popular perception, receiving funding for the business is not a nerve-racking experience. It does, however, call for the entrepreneur to thoroughly evaluate the various sources of funding to reach the right decision. Eventually, the goal of the business is not merely to raise funds. It is about utilising those funds to the maximum effect that causes the business to grow and turn profitable.

FAQs

What percentage of venture capital investments fail?

It is estimated that around 25-30% of venture capital investments fail, as per the National Venture Capital Association.

What are the reasons for startups' failure?

There are various reasons that lead to the failure of startups. Some prominent reasons include wrong partnerships, inability to raise funds at the right time, unprofitable marketing efforts, lack of research, etc.

What are some misconceptions about getting funding?

Some of the basic misconceptions about getting funding are:

• Depending on the existing network
• Focusing on one category of investors
• Depending on banks
• Underestimating the timeline of funding
• Being in stealth mode