Almost every startup founder looks forward to the day when they can find investors to help fund their company’s explosive growth. Unfortunately, some of the mistakes entrepreneurs make in the early days of their business all but ensure they will never receive any significant financial support.
The following “deal killers” are mistakes business owners should avoid or fix before looking for equity investments.
Full founders who don’t add significantly to the company’s value are a major stumbling block for almost any early-stage investor. If you give away a lot of your business before it’s fully formed and before everyone’s worth is proven by the work they’ve done at the current business, then you don’t have much business sense. Every founder has to acquire ownership of a company over a period of years. If you configured your company without this rule, you may need to create a new company that can buy the old company’s assets so that the terms of share ownership can be rewritten.
Significant debt unsupported by revenue will drive almost any sane investor away. A good startup grows organically. It starts small, proves its worth by getting a few customers, maybe borrows a little to get even bigger, and then proves its worth again by increasing incoming revenue. If your business is living on your line of credit because you don’t have a product that people want to buy, an investor isn’t going to volunteer to bail you out. Investors are realizing that compounding the debt of a company without a viable product is a death sentence. If you’re having this problem, you should probably stop looking for investors and start looking for buyers. You may be able to sell your business or some of its assets to get rid of the debt. Otherwise, bankruptcy must be considered.
Founders in conflict almost guarantee that a company will not find outside investment. No investor wants to buy a front row seat to a fistfight. If you and your co-founders are at odds, seek advice before seeking outside funding. Negotiate exactly how and when one or more founders will leave the company and how much they will get if the company is invested or sold. By solving this type of organizational problem before an investor enters the equation, a startup shows it’s ready to move forward instead of fighting old battles.
A company with a declining market will have a hard time finding outside support. You may have started your business when there were plenty of customers for what you needed to sell, but times are changing. You may belatedly hope that you can reuse the assets you create with outside funding to meet new needs. This is very difficult for an investor to sell because they have to wonder why you didn’t pivot sooner. The answer usually has something to do with running out of cash sooner than expected, and that has investors questioning your ability to even run a business. Startups are most attractive when they sell solutions for fast-growing markets. Make sure your business is before you start looking for investments.
Bad books are a deathblow to any business looking for money. You may have started your business in your garage and your accounts receivable may have amounted to petty cash, but you still need to have books drawn up by a professional accountant going back to the day you started your business. Good financial records make it clear who owns what, on what terms, and what outstanding obligations remain. They document whether taxes were paid, where the income came from and how much everyone actually paid. It doesn’t cost much to hire a CPA to clean up your books, and a good one will help you make informed decisions about how to structure things financially in a way that will appeal to new financial partners.
Any early-stage investor understands that they are taking a risk with their money, but they want any losses they take to be related to decisions the company is making going forward, not mistakes made by the founders in the past .