Blog post written by: Mason Cole
Landing an investment is a blessing to an entrepreneur seeking funding to grow a startup business. Unfortunately, it can easily become a burden without proper due diligence. There are many obstacles and pitfalls that lie on the pathway to success, and how the entrepreneur navigates the treacherous road will define the future of the business. Here are a few of the common mistakes young owners can often make when looking to fund their venture.
Requesting Too Little
When faced with an investment opportunity, many entrepreneurs believe they should ask for a small amount to increase their likelihood of securing the funds. This is the wrong way to look at it. Ideally, the investment should cover expenses for at least six months, allowing a startup to focus on growth and innovation. The goal is to provide a long enough runway for the business to get off the ground.
Know the Investor
Before accepting funds from an investor, a startup should do the proper research to make a thoroughly informed decision. Rushing into a financial partnership can be detrimental to the business. Look at the investor’s past investments to gain insight into how they interact with other companies. Are they hands off or heavily involved? Do they have experience in this industry? Have their prior investments been successful? What are their goals? What are their expectations? It is recommended that an entrepreneur be selective when seeking an investor, as the correct person can also be a huge boon to the company and brand.
Understand the Investment
While an investment may appear attractive, avoid relinquishing too much to obtain it. Know the value of the business and negotiate a fair amount of equity in exchange for capital. Not every investor has pure intentions, and these “vulture capitalists” might push for too high of a stake in the company. Do not be afraid to walk away from these investors, as giving up too much equity can lead to losing control of the startup. During the early life of a business, it is even more crucial to avoid giving away too much control, as the company may need to raise more funds in the future. This can shrink the entrepreneur’s ownership share, effectively dissolving the original vision.
There is no easy way to success. However, hard work, thorough research and dedication can create an ideal environment for a budding company. Working with a qualified business attorney can alert a young entrepreneur to many unforeseen pitfalls of launching a startup. While it is the goal of every owner to receive a large investment, be wary of the hidden costs to ensure the funds are fit for the long-term health of the company.
Mason Cole, founding partner of Cole Sadkin, LLC, focuses his practice on intellectual property. Whether you are looking to start a small entrepreneurial business or wanting to protect the next million-dollar idea, Mr. Cole specializes in guiding you from the initial incorporation or trademark to your exit strategy and every stage in between.