Nine Mistakes





This paper is written for entrepreneurs, technology inventors and technology
marketers who are seeking funding to support:

Everyone involved in these activities are referred to in this paper as “Funding Seekers,” because even though their efforts to raise funds will differ, they all confront the same problem: how to raise money when investment funding is scarce.


Most Funding Seekers soon discover that raising capital is the most intimidating, frustrating, confusing, painful and even scary part of their launch. There are many reasons why this is true, but two of the most important are related to the process:

  • Most early stage entrepreneurs and technologists may only raise funds once or twice in a business career so they are unfamiliar with how the fundraising process actually works. This is understandable, because entrepreneurs don’t launch businesses to raise money: they raise money so they can launch a business.
  • While entrepreneurs can develop a plan they hope will work to attract financing, the reality is that investors will be in control of the pace of the funding process irrespective of the business needs of the entrepreneurs.

While a good deal of fundraising “pain” is unavoidable, I’m convinced that Funding Seekers can greatly reduce or eliminate needless pain by carefully avoiding some widespread pitfalls. This paper identifies nine of the most common mistakes and explains how to avoid them.


The first, and possibly the most costly mistake Funding Seekers make is to think they can seek out venture capital firms, or VCs, as their source of early stage capital. This is understandable because of the numerous news reports about name-brand businesses that have made it HUGE on the back of VC funding, familiar names like Facebook, Google, and Twitter, to name but a few. This publicity gives Funding Seekers the mistaken idea that VCs are responsible for an extremely large number of deals, and that they fund many ventures at early stages.

Unfortunately, statistics show the reality of the funding world is otherwise. The US Department of Commerce reports that in 2014, 800,000 businesses were formed in the US, and of these 200,000 employed at least one person.

Yet surveys indicate just a small fraction of these businesses were funded by VCs. The Money Tree Report, published since 1995 by PriceWaterhouseCoopers,and the National Venture Capital Association, provide annual studies of
activity in the venture capital market.

The Money Tree Report has published these key findings:

  • In 2014, in the United States, VCs did only 163, first-time seed-stage deals and only 976 first-time deals at the early stage., for a total of 1,139 first-time deals at each stage.
  • The average VC investment at the seed stage was about $4 million and at the early stage, about $5 million.
  • One-half of all VC investments (across all stages) were made in only two sectors: biotech and software.
  • 69% of all VC funding was invested in just three geographic regions: Silicon Valley, New York and New England, primarily in the Boston area.


About 1100-1200 early and seed stage deals by VCs represents just six-tenths of one percent of the 200,000 new businesses with at least one employee that were created in 2015. Also, it was concentrated on firms in a narrow geographic area and a narrow group of sectors, and involved LARGE initial placements of capital.

Of course, these statistics are a little crude – not all of those 200,000 new start businesses were actually seeking funding, and there were surely businesses started in earlier years that just began seeking funding in 2014 – but these statistics do tell one compelling trend story about VC activity: a very small fraction of the seed and early stage businesses that are funded actually receive money from a professional VC.

So pursuing this avenue for capital is clearly a non-starter for the vast majority of worthy startups – startups that could get funding from another source and could potentially be highly successful. Those who look to this path of VC capital may well find themselves devoting most of their efforts on trying to meet and pitch VC investors, who are likely to simply consider the proposal as not a suitable investment candidate for them. Sometimes, Funding Seekers looking in this direction will waste valuable time and energy trying to develop a business model they think will appeal to VCs, including a business model that can absorb large amounts of capital early, when this would not be an ideal (or even successful) business strategy for them. Increasingly, their goal may be trying to hit the long ball on financing instead of trying to take steps to develop a successful business model – not suitable for VC investment but which is MORE likely to attract capital from other suitable directions – or better yet, WHICH MIGHT LEAD TO BEING ABLE TO AVOID RAISING FUNDING ALTOGETHER.

A second common mistake is to seek out one round of investment capital without having a solid plan of how that early round fits into the “big” picture, that is the plan for how much TOTAL capital the business will ultimately need. “Let’s raise $100,000 and see where that takes us,” is the line of thinking by many a startup.

Unfortunately, the reality is that the moment a Funding Seeker accepts that $100,000, the Seeker has made certain decisions that will often affect all future funding rounds – including structure and payback options, and has created in the mind of the investor a legal and moral obligation to press forward with the business plan that persuaded the investor to makethe investment in the first place. The business reality will often be that the initial $100,000 really won’t accomplish much, without the ability to raise Round 2, 3, 4 and so on.

I suggest that before raising ANY funding, Funding Seekers should adopt a capital funding plan, involving at minimum three factors:

  • What’s the estimate of the TOTAL capital the Seeker believes will be needed to reach “stabilization” – the point where the business can carry itself without raising money other than through traditional sources. Add 50% to that total.
  • Lay out the major milestones needed to get to Stabilization
  • Estimate how much funding is needed at each of those milestones. Add 50% to each milestone total.
  • Don’t seek or accept less than the amount needed for the first milestone.

Another common mistake is trying to raise and deploy far more money than is justified by the market’s acceptance of the business’ products, or services, etc. at its current stage.

For example, if you’ve developed a technology and need $200,000 to turn it into a product, but at the same time you try to raise $500,000 for marketing, your approach is premature. You don’t yet have a product to market, and developing that product should be your first milestone.

Funding – all funding – has a cost. It may “feel” free – but accepting a lot of money before you can produce value is a recipe for having it work against you.Instead, talk with the investor about investing at this stage AND
funding the next round if the Stage One milestone is hit.

A key mistake made in pitching investors is neglecting to focus on the really key factors that would make the business a success or, just as bad, focusing on factors that are essentially irrelevant.

In my opinion, there is no substitute for real substance in a funding presentation – as opposed to simply salesmanship.

Some of the key points that must be highlighted during a pitch presentation come from answers to the following questions:

  • How does the business solve a real need in the marketplace in a unique, different or better way?
  • What is the size of the market and the extent of the competition?
  • At what stage is the business now – really?
  • What milestone would be achieved if it got the funding requested? When
    and how? What happens if that milestone is missed – what’s plan B?
  • How would the team use the investment money?

One more thing: do not spend a lot of time making highly detailed three to five year projections. These are completely inaccurate and based on conjecture. Everyone knows it, so don’t bother. You can put a short form projection like top line sales for 3 years if you like, but it’s probably more important to estimate total capital needs on paper, and show your milestones. Paint a picture of the business from a financial point of view – at the point of stabilization, and leave out all of that distracting detail.

After making a successful pitch, Funding Seekers often make the mistake of relying on the investor to make and structure the offer and principal terms, instead of presenting what they want in a proposed structure. One of the reasons for this is that the entrepreneur may be hesitant or even apprehensive about making the first offer or
setting the terms, possibly to leave room for “negotiations.” In my opinion, this seldom works because it requires a great deal of time and company knowledge to structure the deal right, and most investors do not have time to do this. Inertia sets in and investors will pass up the opportunity if there is no actual deal proposal on the table.

No less an authority than Warren Buffett says that if an acquisition prospect approaches him, that prospect MUST name a price, and if not, he will just walk away. Buffett apparently has no interest in auctions, no does he need to be. The same is true for angel investors.

There may be one exception: If you receive an offer from an actual venture capital firm that will be funding an ENTIRE round, the VC will likely develop their own term sheet and deal structure, and may have strong feelings about those terms. They still will expect some indication from you of your proposed principal terms – which they may well disregard, but it will give them a good indication of how closely their terms track with your expectations.

The sixth mistake is often made when a new company is unable to round up an investor who can “lead” the deal. This lead investor should be someone who is willing to put up at least 25%-33% of the money in the investment round and can negotiate the terms, which smaller investors then piggyback. (It’s OK to have a small group who together would qualify as the lead investor as long as they agree to act together in their negotiations on the round.)

Do not negotiate terms with any investors who are not the lead investor. Instead, make sure that you know the amount of money each investor is expected to contribute BEFORE negotiating. If the investor is thinking of putting down $25,000 in a $300,000 round, then the Seeker may want to include that investor in the round, but he/she should contribute their funds AFTER the lead investor and the company have agreed on the terms. Experience shows that if a company seeking funding cannot find a “lead” investor, or a small group of “lead” investors, the funding round is probably not going to close – unless the round is really small – because trying to “herd” 10 to 20 small investors just becomes too difficult. One major investor inspires the smaller ones to come along, but the reverse is usually not true.

Avoid making your deal structure and legal documentation overly complicated. Use the term sheet, not legal documentation, to outline and structure the deal with investors. All the terms should first be agreed to by all parties before drafting the legal paperwork. Also do not try to copy a VC-like deal structure unless the company is actually receiving funding from a venture capital firm or someone who insists on that structure.

Opt for a SIMPLE structure while the rounds are small, because if your early, small rounds are too complicated, you will have to undo them in later rounds at the request of larger investors.

Don’t let your attorney unnecessarily complicate the documentation, and don’t let smaller investors negotiate a structure that is not justified by the size of their investment. Rely on sample term sheets, stock investment agreements and other documentation packages that have been developed for use at early stages. Good examples are found at, which is an “open source” effort to provide streamlined documentation.

Do not rely on too many sources for advice on your fundraising approach: for example, your deal pitch, your deal structure, what your valuation is, and in particular, what investors are “looking for.” Too often, Funding Seekers change their pitch or funding strategy every time they attend a conference, read something online or in the press about finding investors or listen to a potential angel investor. While the advice may be good, it is too easy to get confused and it can lead to constant changes in strategy. Remember that even though these sources of information can be helpful, without knowing the details of your business model the advice is little more than generic.

A final mistake – and in my opinion a fatal one – is to spend too much time fundraising instead of building the business and making it more valuable. The surest way to attract investment capital is to show, step by step, that the company is reaching its goals and creating value, however small these goals may be. If the business is already attracting customers, then that is a sure sign that it has the potential to be successful. This will pave the way for raising money from investors.


In general, if you can show meaningful progress, you greatly increase the likelihood of finding money.

If you find a customer, then you have shown the best kind of progress, and you’re much more likely to get investment capital.

And, if you find multiple customers, you may not need money.

So, to the extent you possibly can, gear your business model and activities to attract customers – and you may soon be in the position of telling investors that you don’t need their capital. What a feeling!

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