Running a small business requires passion, expertise, and time, all of which you might have plenty of (well, you could probably use more time!) But it can also require a whole lot of money, which you might not have as much of, especially if you’re just starting out. There are multiple funding options to look into, like loans and other types of debt, but you can also consider seeking out investors who could give your business a cash infusion. But before you speak to anyone, you need to know the pitfalls that a lot of small business owners fall prey to! So take a look at these common mistakes to avoid when seeking investments for your business.
Where to Start
First things first: you need prospective investors to pitch to. Where can you look for people, groups, or businesses that might be willing to put up some cash to get your business idea up and running, or to inject some cash into your existing business? There are plenty of options, including:
- Friends and family
- Equity financing investment firms and equity crowdfunding sites that will help put your business in front of potential investors
- Venture capitalists
- Angel investors
- Incubators (for getting business ideas off the ground)
- Accelerator programs (for existing businesses)
- Crowdfunding platforms
Remember, though, there are mistakes you can make at this stage. Some mistakes to avoid include:
Not keeping things professional with investors who are friends or family members
If you have a personal relationship with an investor, you still need to stay as professional as possible, otherwise things could get ugly, fast, and you could end up losing an investor and a friend. You need to explain the details of your plan and create a contract that lays out any terms and conditions attached to the funding. Clarify repayment terms in the contract, including any interest rates, partial ownership, or other stipulations. Be as upfront as you can about expectations for all involved parties, so things stay beneficial for everyone involved – and civil.
Sending your business plan unsolicited to prospective investors
Thinking a venture capitalist, angel investor, or like-minded business owner is the way to go? Be careful about contacting them cold. The majority of them often don’t read unsolicited emails, since they get hundreds, if not thousands, of such emails, and don’t have the time to sift through them all. A better tactic in this situation would be to get a referral to an investor, maybe through someone in their network, like a lawyer, an entrepreneur from one of their portfolio companies, or a fellow venture capitalist. Ask around in your network, as well, and see what you can find out.
Not doing your homework on the investor
Some investors have a niche for what type of businesses they will invest in (like tech, for example), so be sure you know something about each investor you’re contacting. Not doing your homework on investors will make you look unprofessional and won’t get you very far, especially if you’re trying to pitch to the wrong people. But knowing something about the background of prospective investors will allow you to have meaningful conversations, and hopefully get the ball rolling.
Pitching to your ideal investor first
You might think that you should go right to your first choice investor, but you should actually treat your pitches more like a good meal: eat your least favorite part first, and then get to your favorite things, and dessert (are we the only ones who do that?)! Seriously, it’s actually a good idea to do a few pitches with “warm” or “friendly” investors that you aren’t so, well, invested in, so you can refine your pitch and get ready for the big one.
Not checking out other pitch decks
First things first, have you started creating your “pitch deck,” or a brief presentation, usually made up of slides, that gives investors a summary of your business and business plan? Before you finalize yours, make sure you check out samples to make sure you know how to make a successful one. When it comes to your pitch deck, you’ll want to avoid things like:
- Having too many slides with too much information in each – 15-20 slides is enough. You’ll probably only have an hour for your pitch, so don’t go into too much detail in each slide; you can always provide more info after your initial pitch. It’s more important that your pitch deck is crisp and clear.
- Not highlighting your and your team’s experience and expertise
- Not offering a competitive analysis
- Not giving evidence of current customers/interest, if you have any
What to Avoid When Pitching to Investors
Hopefully, now you’ve got some investors ready to listen, and you’re ready to pitch – this is the time to really get it right! So let’s look at some mistakes to avoid when pitching to investors.
Making unrealistic projections
You’re excited about your business, and that’s great – but is it really going to grow to $500 million over the next three years? We hope it will, but that kind of figure just looks pie-in-the-sky to investors, who want to see you back up your claims with realistic figures. Avoid making any projections that are difficult to justify.
Not having a good grasp on your marketing strategy
You know your business, but you also have to know how you’re going to get other people interested. Being vague on your marketing strategy can be a red flag for investors, who will want to know you’ve thought through how you will get noticed by prospective customers in a cost-effective way, whether it’s through social media, content marketing, or paid search engine ads.
Brushing off tough questions
No one is just going to throw money at you, unfortunately! They’re going to ask you a lot of questions before they make their decisions, and some of those questions will be tough. It’s your job to anticipate the questions that will come up during your pitch, but if you do get a question that you haven’t anticipated, don’t tell an investor you will get back to them later. Be ready to think on your feet and answer as best you can: that skill is something investors will be looking for.
Being unclear on customer acquisition costs
Hopefully customers will come flocking to your business, but it’s usually a little more difficult – and expensive – than that! Show investors that you understand how much it actually costs to acquire each customer, as well as that you know how to calculate the lifetime value of each customer you bring on board.
Not giving your product or service its due
Sure, your customers will be at your business’ core, but your business wouldn’t be anything without the product or service you’re selling! That means you need to be ready to really highlight your product or service, answering questions about things like what differentiates your product/service, what milestones you’ve met, how it has evolved, how you could enhance it in the future, what you’ve learned from earlier versions, etc. Better yet, you should be able to demo your product or service, whether physically or with a video presentation.
Avoiding bringing up risks
No business is all rainbows and unicorns (unless you’re in the rainbow and unicorn business) – there will always be risks. Investors know this; they’re big boys and girls and can handle hearing about them. In fact, they will want to hear about them, and will ask you tough questions about the risk associated with investing in your business if you don’t bring them up. So it’s better to take control of the conversation, be upfront, and show that you have thought through how to mitigate those risks.
After You’ve Pitched
Finally, once you’ve pitched your business to your potential investors, there are two more big mistakes you should avoid.
Failing to follow up
You should always send a thank-you note to an investor you’ve pitched to – and we’re not talking about a generic form letter or email. Customize each of your thank yous, and make sure they sound genuine and personal.
Being afraid to say “no”
You put your time and effort into making pitches to multiple investors, and now you’ve got a bite. Buuuuut you’re just not sure that the investor who’s interested is offering you a good deal, or maybe you even feel like they might be trying to take advantage. Trust us, it’s better to say “no” to a bad investor, and keep up the search for funding, than to take on the headaches of that bad investor. So always be discerning about who you allow to get involved in your business, and be prepared to say “no” if it’s in your best interest.
There are a lot of mistakes and missteps you can make when you start looking for and pitching to investors (and the above are just a few!) but don’t panic. No one mistake will ever be fatal to your business; in fact, you can use them as learning experiences to improve your pitching prowess, as well as your skills as an entrepreneur. Remember, honing your pitch will only make you more knowledgeable about your business, which will be a good thing for you, and an attractive quality for investors. Good luck out there!