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Mistakes to avoid when raising money

Posted by Andrew Dickinson on 19-Apr-2017 12:50:35

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“Don’t go dancing when you’re ugly”

Advice given to me by a venture capitalist during my first start-up. If you really do have to raise money from business angels, banks, venture capital companies or private equity then do it long before you start to run out of money. The fundraising process will normally take at least six months so make sure you are not about to go bust just before you close the deal. People who lend money or buy equity in your venture are businesses too and if they see you are desperate you might find the terms of the deal changing – or they might see this as poor management and pull out altogether. Another mistake entrepreneurs make is over-egging the forecast upon which investors are basing their valuations. If you are not making your numbers during the fundraising process you will make your potential investors nervous. Again, they may pull out or change their offer. 

If you can avoid external funding completely I would recommend it or at least until you have a proven business that can stand on its own two feet. Then you are raising money for growth not survival and this puts you in the driving seat with potential investors. If you believe in your business then back it with your own money because if you’re right, anyone buying your equity right at the start is getting a real bargain. In my first start up we funded the business initially by selling equity to friends and family and re-mortgaging our houses. Mistakes.jpg

A final note on venture capital funds and private equity. Generally I don’t believe in the concept of clever-money. This is where a potential investor professes an expertise in your type of business or industry and attaches a premium to this by way of a lower valuation or monthly charge. Most are not great at running businesses or at least not yours. They are there to provide you with money and help with further fund-raising if needed. They have a seat on your board to protect their investment, so be careful about letting them meddle in your business. Check all the drags, tags, rights and restrictions in the contract and think carefully before you agree to pay any management fees. Some investors particularly private equity, will want to purchase more than 50% of your company. If you agree to this then understand you are giving up control and becoming an employee, regardless of assurances they may make you about leaving well alone.

The team at Jola have been starting up and running businesses successfully for years. If you are interested in working with likeminded suppliers, contact Jola.

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Topics: Jola Cloud Solutions Ltd

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