Nearly every startup seeks funding of some sort. For those going to others for investment — be it friends or family, bank loans, angel investors, venture capital, or some other form — most go about it the wrong way. Today, let’s take a look at the 13 warning signs of a bad startup funding strategy.
A successful startup can be very rewarding for investors. But investors need to choose properly before they devote their financial resources to startup funding. When investors of any kind are making the decision as to whether or not they should invest in a particular startup, they are likely to walk away if they see any of the 13 warning signs of a bad startup funding strategy outlined below. This is why it’s important to watch out for them, to not only protect you and your startup, but your investors (if that’s the route you go) as well. Here we go:
1. Weak Research
The most effective and efficient startups have a good plan in place — — and it all starts with research. Effective research actually covers a number of areas, all of which are equally important. Among these include:
Market research: It is important to thoroughly know and understand your target market. So often, I hear founders say “Our target market is everyone,” or “If we capture just 3% (or whatever) of the population, our MRR (monthly recurring revenue) of $XXX.” No. No. No. That is not the way it works and that is certainly not any investor wants to hear. If you want to build an enduring, profitable startup (regardless of whether or not you want to raise capital), you need to understand everything you possibly can about your market and in particular, about your target customer. Start small and you can branch out from there. Impress your potential strategic partners, investors or even future founder team members with your knowledge of your target market and your target customer. Some good sites for market research include the Alexa Blog, MarketResearch.com and Jim Vileta’s Research Launchpad, hosted at the University of Minnesota.
Competitive research: Like market research, it is equally important that you know everything you possibly can about your competitors. Not fully understanding your competitors will not only inhibit your ability to raise capital from any source, but will also significantly harm your ability to secure customers, establish strategic partnerships or even hire and retain quality founding team members or employees. IntechInc provides a list of competitive research tools but you can also learn a lot by visiting competitor websites, creating Google Alerts about your competitors and following them on social media — just be sure to not leave out any platform that they are of a part of because they may target more than one customer or industry segment. Jim’s Research Launchpad mentioned above also provides some great research tools.
Funding prospect research: Don’t even think about approaching a potential angel investor, venture capitalist/firm or high net worth individual until you have thoroughly researched them. At the very least, you should know their industry/investment interests and the types of investments they have previously made. On a side note — it’s not wise to ask for money right away. Your goal in speaking with a potential investor should always be to get to the next meeting. Some of the best sites to conduct research on prospective funders include Crunchbase (it’s worth it to pay for the premium version) or Angel.List. If you are interested in non-dilutive funding sources such as business grants at the federal level (e.g., SBIR/STTR grants, etc.), be sure to check out Grants.gov. I also have my own proprietary database of local, state and regional non-dilutive funding opportunities — simply contact me if you would like to discuss and learn more.
There are really more areas of research but the three above are critical to not only building an enduring, profitable startup, but if you are looking for investors — even if it’s family and friends or a bank loan — they are essential to raising capital.
2. Disorganized Business Model
Ugh. I cannot tell you how many times I see founders pitch a disorganized or convoluted business model that just doesn’t make sense. Either it just looks bad or simply doesn’t present a financially viable business model. A startup that is disorganized may excuse itself as being “creative” or “disruptive” but if even the most savvy investors cannot make sense of it, you are heading for trouble. Don’t fall into this trap. A business model that is disorganized will rack substantial losses and incur a bad reputation among investors and of course — -it will not be profitable or successful. . It can also cause unnecessary workplace stress that will not bode well for its future. There are a ton of great resources for building a sound business model. Check out the Business Model Canvas and learn more about building a solid business model at resources such as fi.co.
3. Poor Management Team
A startup will only go as far as its core management team will take it. If the founding team is not quick on its feet and cannot pivot or make the right decisions on the fly, the startup is likely to crash and burn As an angel investor (albeit a small one), I invest in people and teams as much as I invest in the startups or the products/services they offer. I believe that a great founder/management team can make a mediocre product/service a huge success but a poor team can make even the most groundbreaking idea a massivee failure. Pay attention and build the right founder/management team. Don’t take just ‘anyone’ because that is what you feel you need. The worse decisions are made when you are desperate.
4. Poor Team Culture
I cannot overstress the importance of having a strong team culture. Sometimes, even when key members of a startup depart the organization, they leave behind a negative organizational culture energy that haunts the startup for years. The strongest and most well-developed startup teams embrace a culture of diversity — diversity of gender, gender identification, sexual orientation, and diversity of opinion. Diversity in your startup team and a diverse team culture are essential to startup success. And the time to start building a strong, diverse team culture is now — before you begin your funding planning strategy.
5. Weak Funding Structure
The funding structure of a startup refers to the mix of equity and debt that it possesses to finance its operations. A startup that is overly dependent on debt — and has no self-sufficiency with its own cash reserves — will falter quickly, especially if its product is not compelling early on and does not meet revenue generation expectations.
6. Weak Funding Sources
The phrase, “Never put all of your eggs in one basket,” exists for a reason. If a startup solely relies on one investor or one revenue source, it can quickly lead to its demise. Even the retail behemoth Wal-Mart has a policy where it will not take on a new vendor unless more than 50% of the company’s revenue comes from sources other than Wal-Mart.
7. Undefined Goals and Vision
I love the phrase “Any dog can be a guide dog if you don’t care where you are going.” A lack of foresight and vision can doom a startup quickly. If you want your startup to be successful, ensuring and profitable, then clearly defined goals and vision are essential for securing investors, achieving funding goals and revenue goals, growing your customer base and attracting top quality founding team members and employees.
8. Undefined Actions
Startups with moves that are unplanned, erratic and impulsive will not bode well long-term survival. Instead, if you have clearly defined goals and vision, then you should have a step-by-step roadmap, action items and timelines for achieving them. Without them, you won’t secure investors, customers, strategic partnerships or even quality employees.
9. Bad Product Experience
In business, product experience is king. No matter how much investment it gets, if the startup’s product or service is not compelling or if it draws too much criticism from customers, the startup is not likely to last long. There are literally hundreds — if not thousands — of startups that have imploded because of bad product experiences among their customers. Don’t make the same mistake. The best way to avoid this mistake is to get out and talk to actual customers, have them use your product or service, get their feedback (good or bad) and incorporate it into your product offering as appropriate.
10. Poor Marketing and Focus
A product or service will not be successful if your customers don’t know about it. A startup with no plan in place when it comes to marketing will not likely be successful. As an angel investor, I frequently see marketing plans mostly written as “social media,” “viral marketing,” or “influencer marketing.” That my friends, is neither a compelling nor a focused marketing strategy. Instead, you should know exactly who you intend to reach and precisely how you will reach them. And remember, start narrow and grow from there.
11. Poor Resources
Most startups do not have enough funding in the beginning but this should not be an excuse to poorly manage your resources. The days of ‘winging it’ are long gone. Today’s startup environment demands much more than a casual understanding of your firm’s resources. For the startups I advise, I always recommend a process of “Asset Mapping and Resource Gaps Analysis.” This enables founders to know exactly which resources they need to achieve their goals, along with a plan and timeline for how they plan to acquire them.
12. Legal Challenges
Legal challenges can hamper the development of a startup, especially if you are in a field such as cannabis, fintech or financial products. These industries — and others — are highly regulated and as such, legal and regulatory obstacles should be dealt with early on. My advice is to hire a strong legal team with experience in your particular industry or sector. Otherwise, you will not be able to attract investors and you may in fact, find yourself in legal trouble.
13. Bad Debts
Bad debts are reflective of the decision-making of the startup founder. In the startup world, ‘bad debts’ can actually mean a number of things. For instance, it can mean that the startup is too heavily dependent on outside debt to be financially viable. This scenario can chase away prospective investors, customers, vendors, strategic partners, founding team members and employees. As a founder, pay close attention to your startup’s debt structure. This is not to say that all debt should be avoided. Some debt is necessary and even good. There is also the emerging field of venture debt, a capital raising strategy that founders in certain industries might want to explore as an option.
Most statistics will tell you that 90% of startups will fail. While that specific number is debatable and sometimes difficult to quantify, regardless of the percentage, as a founder, you want to do everything you can to avoid these 13 warning signs of a bad startup funding strategy. If you are an inexperienced founder, you might want to consider launching your startup through an accelerator such as the Founder Institute or another one.
Accelerators such as these help you avoid the typical mistakes many founders make, provide you a wealth of technical assistance, sometimes offer funding and generally, offer access to their network of mentors and even sometimes, investors.
Interested in learning more about you as a founder can avoid the 13 warning signs of a bad startup funding strategy? Contact me today and let’s talk!