Six common startup funding mistakes and how to prevent them

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The Startup Boom is here to stay and it is drawing eager Angel Investors and Venture Capitalists, like bees drawn to nectar.

The figures speak for themselves. A clutch of 44 Indian startups was crowned with the coveted unicorn status by the year-end of 2021. Across the globe too, 90+ startup ecosystems created a billion-dollar set-up.

But this is just the brighter side of this growth story.

Very often startup funding mistakes can cause utter mayhem to an investor’s war chest. One funding mistake and millions and billions are lost when so much is at stake.

The harsh truth of investing in startups really hits home when we see the following facts:

  • 90% of new startups fail to sustain and grow.
  • 75% of venture-backed startups fail to progress.
  • Only 40% of startups actually manage to earn a profit.

So what do these figures say?  Investing in startup companies is a very risky business. It is definitely not for the faint of heart and shallow pockets. There are a few common funding mistakes that an eager investor can make in the bid to perhaps crack that elusive deal or snag that next “big thing”.

Mistake 1: Getting caught up in all the hoopla and hype built around the startup 

Startups are typically about a snazzy, glitzy workspace, with cool conversations strewn with words like innovation and revolution happening around the workplace. This could be pretty exciting and tempt you to loosen those purse strings. Look Beyond All This. Dig deep to find out what the business model is actually all about and who are the people behind it. A track record may not be everything, but it is definitely worth studying. After all, it is money we are talking about here.

Mistake 2: Failing to ask the right questions and getting answers to the tough questions 

These are the most common startup funding mistakes. Always Ask. Asking the right questions and demanding answers to the tough ones is what prudent investing is all about. Questions like what problem is the startup solving? How relevant is it? What is the technology all about? Is it patented? Is there an alternative to it? When is break-even expected? What are the Market Research indications? All this and more needs to be asked so as to avoid making those basic funding mistakes and accumulating regrets and losses in the future.

Mistake 3: Investing all the money in one idea

When an idea sounds so good that you can already hear the cash registers ringing, the temptation to whip out the pen and write the cheque is overpowering. Stop Right There. Beware of the pitfalls of investing in just one deal. This is one startup funding mistake to definitely avoid. Always look for and examine alternative deals that are available. A smart investor will always spread his risks. Who knows, there may be something better available.

Mistake 4: Investing more than necessary

Sometimes a deal could lure an investor to invest in it a bit more than actually needed. It is human nature to not let go of the chance to earn more. But Remember. Investing just the right amount or using a better word optimally, is also something every smart investor needs to learn. Never make the startup funding mistake of investing more than you can actually need to. Why stretch your reserves? Why create a bottleneck for your cash flow?

Mistake 5: Ignoring looking for any competitive advantages before investing

This is business. It is competitive and ruthless. No matter how attractive the returns, how strong the promoter credentials or how sound the business model – Every Single Advantage CountsOne of the common funding mistakes is to invest with the heart or simply at face value. Make sure to check out how the startup fares in comparison to the competition. What is so different about it? Does it have better pricing? Does it have a cheaper and better service offering or tech? Ignore these checks and balances and perhaps it may invite the risk of loss. Check for that edge and end up with an investment that could be a winner in the long run.

Mistake 6: Investing in a startup with a low growth potential

Investments are meant to bring in returns and that too without waiting for too long a time. So investing in a startup that has revenue or ROI projections that look distant, because of low growth, is also considered as one of the funding mistakes. Never Settle For Less. Always seek to invest in companies with a presence in markets that have high growth potential and will give ROI at an early stage.

For learning more about the How and Why of startups and investing in them connect with Coffeemug.ai. An online professional networking platform for having genuine conversations and building relevant connections with mentors. 

FAQs

Q. What is the most common financial mistake?

A. Failing to create an effective financial plan or budget is the common financial mistake most entrepreneurs make. 

Q. What is the biggest mistake a startup can make?

A. Undervaluing their products or services, hiring wrong staff, expanding the business too quickly, creating an inefficient marketing plan, overpromising and underestimating business opportunities are some of the major mistakes a startup can make. 

Q. Can investors ask for their money back?

A. Investors may “want” their money back, but they usually can’t “have” it unless it’s explicitly stated in the agreement from the start.

Q. How do you avoid financial mistakes?

A. One of the best ways to avoid financial mistakes is to estimate your expenses, create a budget plan, avoid any unnecessary spending and save money as much as you can. 

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