Startup Funding Mistakes

3rd March, 2016 by

Finding the money to back your business can be tricky.

For startup founders trying to find success in the Silicon Valley bubble, obtaining funding at the right time from the right source can dominate much of one’s time and energy. Indeed, the ways and means through which an entrepreneur can attain funding have expanded drastically in the last five to ten years, as the tech sector has catapulted itself into the hearts and minds of investors. Everyone wants to be either the person with an idea for the next big thing, or the bank-roller who gets to cash in once their investment has hit it big.

For many seeking funding, it’s easy to look at the success of other startups and assume that it’s best to go by that tried and tested playbook. But the truth is that every startup is different, and because the climate of the tech world and Silicon Valley changing minute by minute, you can’t always guarantee that what worked for one will work for another.

One also has to keep in mind that in the tech world bubble things aren’t always what they seem. Some of the most well-funded and hyped startups end up crumbling in a relatively short time thanks to any number of problems relating to management, leadership, bad financial judgement and inexperienced entrepreneurs handling amounts of money that they’ve never dealt with before.

While there is no exact rule book for avoiding the waters of financial solvency in Silicon Valley, there are certainly some common mistakes that founders can make. Here is a list of things to keep in mind when your startup is on the money grind:

Don’t mortgage your startup: While early stage funding always carries a lower risk, if you’re seeking later stage funding to keep your startup afloat the stakes are much, much higher. As expert David Frankel wrote in TechCrunch, “With a mortgage, you don’t buy a house. In reality, you’re placing a 20 percent down payment and living for the next 30 years in a home the bank owns. The same is true of [late stage start up investment].” Don’t get so desperate for cash that you sign away all your collateral. And if you must, be aware of precisely what that dynamic looks like so you can negotiate the best terms.

Don’t blow through cash because you can: This one may seem obvious, but there are certain types of entrepreneurs who attain a cash flow investment and then feel the need to keep up appearances in the form of lavish spending. While appearing not to worry about money and the little things in life may make you feel like you’ve “made it”, it won’t inspire much confidence in your investors, and it will undermine all the hard work you put in when you were a lean startup who worried about every expense. Be modest and intentional in your spending even when your business is more established and financially stable.

Know the terms: Sometimes entrepreneurs are so desperate for cash that they will accept any terms that an investor puts forth. This is a mistake. Don’t settle for information asymmetry when it comes to accepting funds. While investors may understand the process of giving you money, you may know a lot less, so it is up to you to fully educate yourself and seek out the right counsel before signing away your success. You don’t want to be caught in the position of accepting terms of a deal that could end up hurting or killing your business in the long run.

Yes, the person who is giving you money will want to see a return, but you should ensure that they believe in your vision and have your long-term success in mind as well, not just their bottom line.

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