How to avoid the six most common startup funding mistakes

Many founders start off by self-funding. Such reliance often means entrepreneurs feel huge pressure to attract an investor as soon as possible. Securing funding can become an obsession. It builds anxiety, especially when The UAE Startup Access To Capital 2010-2020 Report shows that companies that lack capital are 1.5 times more likely to go out of business.

Yet, in the rush to attract investment mistakes can happen. It’s easy to skimp on the research, get the timing wrong, and make bad impressions. So let’s take a look at what we think are some of the top mistakes startups make when trying to secure funding and how to side-step them.

1. Lack of research
The rush to gain investment can mean not putting in the time to do enough desk work. This means not knowing your business and market well enough, and just as importantly not knowing your investors. It’s easy to become seduced by venture capitalists with amazing resumes, but you have to ask if they are the best option for your business. You’ll only know the answer through research.

Get the research right: To start with, ask yourself some general questions, because from there you can start to answer more complex ones. The end goal should be to have a business plan in place. Start by considering:
• Your reasons – Why are you seeking funding?
• Your vision – What are your long-term goals? At what speed would you like to grow the business or hire new employees?
• Your competitiveness – Is the product marketable? How large is the market?
• Your investors – Who are they? What are they looking for?

2. Not knowing how you’ll spend the money
Knowing where you plan to spend the cash is an essential part of your business plan. It’s also frequently forgotten as people focus on trying to prove the value of their product or its place in the market. Few investors are ready to hand over cash without a detailed discussion about where you plan to spend it.

Planning for investment: What you tell them depends on your own business priorities. But you’ll need to show how frugal and efficient you plan to be with the money. Here are a few key areas to consider:
• Hire the right people – Investors will often invest in the team not just the business idea, so knowing who you plan to hire is key.
• Take the product to the next level – If your product is a prototype it could be time for testing and mass production.
• Market the product – Could you spend the money making it attractive to your key market?
• Increasing sales – Return On Investment (ROI) is vital to investors, so save some of the funding for increasing your sales.

3. Not knowing the investor
The reality is that there is a certain type of startup that will attract a certain type of investor. If your company isn’t right for them, it’ll never be right no matter how much effort you put in. Making sure your business ticks the right boxes for the right investor will help you secure the investment you desire.

Know your investors: Last year, UAE-based startups raised nearly $600m in venture funding alone, so there are plenty of options available in the region. These include angel investors, venture capital, public funding, crowdfunding and corporate investment. Each is looking for a certain startup growth-stage – and each of their websites will likely stipulate what they look for. If they don’t, send them an email and get a feel for whether you could be the perfect fit.

4. Poor timing
Often people get stuck asking: do we self-fund or do we go for investment? But assuming your business won’t fail right now without a venture capitalist, this isn’t really the right question. While there are some famous examples of businesses that have succeeded without funding – Sara Blakely started Spanx without any investment, for example – it’s likely you’ll need financial support at some point. In a recent list of the top 20 UAE startups to follow by Startup Stash, all of them have gained some funding. The question, then, should really be: when is the time right to seek funding?

Get the timing right: With any luck the first three points above should provide you with a clear picture of when the perfect time to go for investment really is. Perhaps it’s when you need to bring in some key employees in specialist areas; perhaps it’s when you’re ready to move to mass production. Whatever your company needs from the investment, knowing the right time to look for it will also stop you becoming too obsessed with funding.

5. Bad first impressions
First impressions count. Research published in the journal of Social Psychological and Personality Science during 2017, for example, showed that we judge trustworthiness in the first second of meeting someone. This is not to say that everything after that means nothing. Clearly it means a lot, but it is vital you make sure every interaction is a good one.

Making good first impressions. With anyone in business you often make a number of first impressions. The very first will be the application form and emails, so make sure there are no spelling mistakes and keep them professional. Then there are the meetings, which will likely involve someone new each time (making, in effect, a series of first impressions to consider). Last but not least is the presentation: make it smart, make it short and to the point, make it tell a memorable story – and make it professional.

6. Not asking for feedback
The brutal reality: you’re unlikely to get the funding right away. At some point you will probably have to deal with rejection. This is a big part of being an entrepreneur and a big part of many of the most famous startup success stories. But you can turn that downer into a positive by asking for constructive feedback.

Getting feedback: Once you’ve received that ‘Thanks for your time but unfortunately…’ email, consider what you think went wrong. Then email back and ask if there was any feedback they can offer about your pitch, product or team. Does what they say match with what you thought? It often doesn’t, this in itself is a key learning for next time.

Don’t be hard on yourself
These are six of the biggest mistakes we see when entrepreneurs make when searching for funding. But one final point is to remember that these mistakes are common among most entrepreneurs. Ask any entrepreneur and they’ll very likely admit to having made a few of them. So, as with all mistakes, if you find yourself unable to avoid them, remember they only exist as the perfect opportunity to improve and learn for next time, so that you can increase your chances of being funded.

Hanady Amin is the Assets Director at Meydan Free Zone