Top Fundraising Mistakes
This post is a follow-up to the initial post about fundraising and focuses on the top fundraising mistakes.
Common Advice
A recap of common fundraising advice.
If raising a seed, use a SAFE. You will save on legal fees, which can be very high ($20k+ - even for a seed round). If you raise above a seed (series A and later), do a priced round.
Make sure you raise enough to get to your next milestone. Raising the incorrect amount (too much or not enough) has consequences (see below). Just focus on reaching your next milestone, do not listen to the noise around and completing side quests.
Make sure your valuation is right. Your valuation must reflect what the market is showing and what you think is a reasonable value for the business. Be realistic and do not try to make yourself look better than you really are.
Mistake #1: Raise too much
Why? Investors offer you money and tell you that “you need the money to put fuel on the fire”. You believe them, think you can pay yourself and your cofounders more and even hire more people to do some of your tasks.
Problem #1: by raising too much, you probably gave up too much equity. When doing a seed round, you want to give away ~20% to ~30% of your business. If you raise too much, you may give too much equity (I have seen 40% to 50%), which will reduce your control of the company.
Problem #2: having too much money is a problem because you will not focus on your core product. Instead of focusing on the main game, you go and enjoy taking side quests. Focus on the main quest, kill the boss (e.g. get product-market fit) and only then, go do the side quests.
Example: I have multiple stories where founders raised too much money. One founder even raised so much money that he was funded until his newborn can turn 18. These people will get more comfortable and not have a sense of urgency to execute. People that have their back against the wall will execute relentlessly and go faster.
Mistake #2: Do not raise enough
Why? You do not find enough investors for your company or you would rather not give up too much equity.
The Problem: you did not raise enough and cannot reach your next milestone. You need to raise again, which will take focus away from building a great product. As time goes by, you never reach your milestones when you ask for more money and investors stop trusting you.
Example: a founder who never raised enough is always asking for more money. I actually never saw them delivering on their milestones. Funding became impossible.
Mistake #3: Valuation too high
Why? A high valuation means you can raise a large amount of money and reduce how much control you give up.
The Problem: if you raise at $X, your next raise is likely to be at 1.5x$X or 2x$M. If your valuation is too high, you will very unlikely be able to justify such a valuation for your next round, and it will be difficult to attract investors. Another issue is a potential exit: if your valuation is too high, it will reduce the list of potential buyers (or you may have to accept an offer you do not want).
Example: a founder raises a $5M seed round at $25M valuation. The series A will need to be at least at a $35M valuation, and probably closer to $50M. It means that they will need to get ARR in the millions, which is extremely hard. If they want to sell the company for any reason (got tired, cofounders fights, etc), they are likely not going to get $25M for it and will likely not make a profit.
Mistake #4: Valuation too low
Why? A low valuation attracts investors.
The Problem: you give FAR too much equity. If you continue like this, you will end up with less than 50% after series A and lose control of your own company.
Example: a founder raised a seed round and a follow-up round a few months later. Before series A, they already did not own the company and got kicked out.
Mistake #5: Unethical Investors
Why? Founders are desperate to get funding and access predatory terms from shady investors.
The Problem: investors will ask for greedy shady terms that will give them too much control of the company too early. At the seed stage, raise with a SAFE. Once you enter Series A, give a board seed to one lead investor that provides value and has experience in your domain.
Example: a founder raised a round and gave too much equity. One shady investor owned more than 50% of the company and replaced the founder from his CEO role.
Additional Thoughts
When I raised money for Codiga, I planned about how much I will need to get to my next milestones. I originally planned $1.5M and was able to raise $2.1M, which gave me some cushion for mistakes (and god I did some!). I refused a last tranche of funding (approximately $300k) because I did not need it and I would give up too much equity.
Some founders told me I was stupid for not taking the additional funding. It turns out it was the right decision.
My valuation was within what the market was at the time. However, we started some valuation being very high ($20M+), even at the seed stage. Some advisors recommended that I bump my valuation. I refused to do so because it would make it impossible for me to reach the metrics required to justify such an inflated valuation.
It all worked out. Our raise gave me enough money to develop a good product. And our reasonable valuation attracted larger companies to acquire us quickly.