5 Common mistakes startups make when applying for funding

There is a perception among entrepreneurs that a revolutionary idea is enough to secure the venture capital needed to kick-start their businesses. This is simply not true. Here are five of the most common mistakes made by entrepreneurs when applying for VC funding.

1. No WOW! Factor
The first rule in the VC game is that your business proposition must have an exceptional differentiating factor. You need to know what your sustainable competitive advantage will be. If you’re trying to raise funding for a conventional business or idea like a franchise or service business, VC is probably not the right place to start looking.

No ad to show here.

For the best chance of success:

Be sure your business has that x-factor.

Do your research — understand what industries or types of businesses VCs are willing to fund. If you’re unsure, call them first to clarify before applying and wasting both your time and theirs.

2. Expecting a 24-hour turnaround
A large number of applicants turn to VC funding at the eleventh hour as a last-ditch effort before running out of capital. Securing VC funding is not for the impatient: Business analysis, building the investment case, approval, due diligence, and legal and financial structuring are undertaken with meticulous care and attention to detail. Plan for a longer process than you imagined as it could take a number of months depending on the deal size and stage of the business.

For the best chance of success:

Don’t leave it to the last minute – VC funding is more difficult to secure if it’s seen as a last-gasp effort.

Plan for the long run — get to know the VC funds and managers. The vast majority of deals are done through referrals and existing relationships.

3. Touting an untested idea
VC analysts and fund managers are unlikely to be swayed on the strength of a business plan alone. For the best chance of success, develop a working prototype or some basic software. VC funds respect entrepreneurs who have risked their own funds and resources to get their big idea off the ground.

For the best chance of success:

Before hitting the VC trail, build that prototype or get your software to a test group.

Develop a solid business plan that clearly spells out the potential for your unique solution to a specific market’s burning need.

Avoid jargon in your business plan, make doubly sure it’s free of errors, and tailor it to the fund’s specific mandate.

4. Neglecting the real numbers
A solid business plan is not based on assumptions. VC funds want to see market research reflecting real data to back the financial projections. They want to fund entrepreneurs with an in-depth understanding of the market, both locally and internationally.

For the best chance of success:

Do your own research — this gives you better, direct insight. There is plethora of online tools that enable you to gather data quickly and affordably.

Be sure to do a detailed competitor analysis, where you compare your solution to others on a feature-by-feature basis. Also consider future territories and include relevant data and sources.

5. Lacking a clear development path
Too few entrepreneurs have a clear understanding of how much funding they actually require for the next stage of their business. And sometimes are even unclear about what the critical goal is that the funding is to help achieve. You lose credibility if you return to the market for more funding without having made significant progress.

For the best chance of success:

Be clear about why the funding is needed and what it will help you achieve.

You need to determine how much actually need and not how much you think you should raise based on ‘norms’ — the more you raise in the early stage of your business, the more equity you will have to give up.

At the same time, make sure you raise enough to get you to the next phase, and work on the funding carrying you for 18-24 months.

Image: Flickr