Apr 14 2019Entrepreneurship
The 5 most common errors of startups when seeking financing
The National Institute of Statistics and Geography (INEGI) calculates that two out of every three Mexican companies fail before or upon reaching five years of productive life, so in the long run, only 11% of these economic units will reach 20 years or more.
However, there are many who even die, before formally debuting as a startup or SME, due to lack of financing, either by external capital or banking institutions, but why can’t they get it?
Investors, however ventured they may be, sometimes prefer to say "no" instead of compromising their capital, even if the idea "sounds good", due to errors in the planning and logistic of projects that "do not check" for them. Many (investors) have experience in business development, in addition to intuition; therefore they know how to detect when a business may have problems to strengthen and, thus, delay the recovery of their capital.
Some of the mistakes founders make when requesting funds are:
- The lack of experience and overconfidence or enthusiasm of the entrepreneur often blinds him to foresee some situations that involve risk, like the fact that the product or service is not necessary in the market. It sounds implausible, but this situation is the first reason why startups disappear, according to a study by CB Insights.
- At the time of laying out the business model, they are not including purchases or expenses that will be required to start, the entrepreneurs only contemplate those amounts that will be used when starting operations, without foreseeing that the first day already implies a budget . In these circumstances, it will be difficult to correct the road, because flow management will continue to complicate itself (30% of the financed enterprises run out of cash before fully executing their idea, CB Insights has indicated).
- Is not clear what will the financing will be occupied for on the business development process part, which reflects the lack of knowledge in business management and the absence of a consultant or counselor that guides a good application of strategies and resource management. Given this, it is important to have a multidisciplinary team before, during and after the venture, which will be key, because a group of people with different skills and knowledge can bring new angles of a same issue and even better if the team members can help with the understanding of fundamental economic principles.
- Owners of ideas not always agree on making investors their strategic partners. Some funds require representation and decision-making power within directors board and the startups management team, so founders tend to get a little scared and tend to think that their projects can be subtracted; however, they let go a great opportunity not only to obtain the necessary capital, but also to learn the sector's "know-how" that involves knowing about customer portfolios, training and accessible raw material costs.
- A badly designed pitch. For this, it is necessary that the applicant understands his own project well enough to know how to sell it, from the market research that will sustain the existence of the service or product, to the marketing strategy that will be used to promote himself, and the objectives and goals that wants to achieve in certain deadlines. If an idea can't be fully understood, it will hardly be possible for someone to fall in love with it.
Thus it is urgent that entrepreneurs notice what they are not understanding well when preparing their project and selling it, because maybe the idea is not bad, but calculations are, and can lead to exceed seed capital and practices that take them far from success, because errors such as those mentioned above will generate a "risk of loss of money and time" among investors. Given this, the suggestion is to detect and optimize costs from day one, calculate fixed costs while underway and open up to possibilities of learning new things, every day.
Also, it would not hurt for entrepreneurs to prepare themselves by completing a diploma in management or business training in order to avoid wrong impressions like "money is the only reason for going".