A lot has been written on how to raise capital for your startup. I have also touched it in the past with when you should start meeting investors and how to improve your investment pitch. However, I want to talk about a few mistakes entrepreneurs sometime make which look REALLY bad from an investor standpoint. These are the kind of things that just shout out ‘rookie’ or ‘inexperienced’ and can even be enough to pass on a deal. The list below is definitely not a comprehensive, but hopefully it can help understand the kind of things you should avoid.
- Unrealistic growth projections – There is a reason investors want to see financial projections even though everyone knows they are inaccurate 99% of the time (especially for early stage companies). We want to see how you think about your business and what assumptions have to hold in order to grow fast. When we see revenue growth rate which is completely out of touch with other (top) startups in the industry it raises a huge red flag about your understanding of the space.
- Unreasonable TAM – Experienced investors typically have good instincts on whether a market is large enough or not. Your TAM analysis can help verify this instinct in the marginal cases but it’s very unlikely it will completely change an investor’s mind. However, when we see a TAM that is totally out of whack with what we would expect for the industry it can backfire. Similar to the previous point, it makes us doubt you really know your industry.
- “This is the last round” threat – Unless the company is already mature, it’s a terrible tactic to try to scare investors into investing by saying it’s the last round of financing. Typically this mistake is combined with mistake #1 of unrealistic growth expectations. Startups need money to grow and even more so when they grow fast. It’s an non-credible threat that makes you looks like a rookie.
- A lot of logos with no revenue – When you show many customer logos in the beginning of the deck we naturally assume the company is generating meaningful revenue. But too often we get to the financials only to realize this is not the case. There could be two reasons for that: Either the company’s definition of ‘customer’ is very loose and includes nonpaying ‘customers’, or the company can’t charge enough for the product. Both options are equally bad.
- Fake precision for early stage companies – It’s important to measure things like CAC, CAC payback, CLTV and churn. But it’s also OK to admit you are an early stage company and don’t have enough real data to measure these metrics. Too often entrepreneurs try to impress by showing amazing metrics (“we have 10x CAC to CLTV ratio”) which turn out to be completely based on assumptions or anecdotal evidence. Watch out from this- it can backfire!
- Writing the expected valuation – It’s OK (though not always recommended) to say ballpark valuation expectation when asked about it in a meeting. But when I see a company that writes in their deck something like “raising $5M at a $15M pre” I will most likely not take the meeting. It’s not that I care about the suggested valuation, but any experienced enough entrepreneur will know that valuations are determined by investor demand. To mention it in writing in a deck is (A) unrealistic (B) takes away your leverage in the negotiation. We don’t want to back someone who is that naive.
- Calculating investors expected returns – once in a while I see a deck that shows the expected return for investors (mainly from banker led deals). This is another one of these things that might terminate interest in the company. The entrepreneur’s job is to build a huge company. This is what he should be obsessed about. It’s almost impossible for investors to calculate expected returns from an investment, so this is definitely not where you should be spending your time.