What Are The Biggest Mistakes Made By Startup Entrepreneurs?
19th July 2018
Author
Hannah Smith, Business Manager, Anglia Capital Group
Anglia Capital Group hold pitching events throughout the year where carefully selected companies are invited to pitch to our investor members for potential equity investment.
Angel investment is a form of finance for early-stage businesses offered in return for a share of equity in the business. It is typically one of the earliest equity investments made into a start-up business and is actually the largest source of early-stage capital in the UK.
Angel Investors, or Business Angels, are almost always wealthy individuals, usually successful ex-entrepreneurs or professionals, that tend to band together in networks in order to share knowledge, expertise and risk.
They are often seen by entrepreneurs as the ‘friendlier’ source of finance. And indeed, are often more accommodating than VCs, banks, and other finance providers. This is because they are willing to take a higher risk by investing at an earlier stage. Why?
- They are investing in the people – you. 90% of Business Angels say that people are the deal-breaker.
- They are aware that high-risk equals high potential return, and so they are looking for the next Google, Facebook or Uber.
Angel Investors are not stupid. They tend to be fully aware of the huge number of start-up businesses that fail. For this reason, you should never expect that raising angel investment will be easy. If they are going to invest, they are going to make sure that they are as certain as they can be about you and your business.
If you have the ability to put yourself in other people’s shoes, the following list of mistakes should seem like common sense. It will be a surprise for you to hear then, that these are some of the most commonly quoted reasons for an Angel Investor to be ‘put-off’ a deal, assuming your business concept enticed them in in the first place!
READ: A Complete Guide to Angel Investors for Small Businesses and Startups
1. Mistakes in your business plan
This is a controversial one. Think about the 50:50 split of people that would or wouldn’t reject a CV for spelling or grammatical errors. It’s the same concept.
Personally, I would be put off. I’m expected to hand over thousands of pounds (sometimes hundreds of thousands of pounds) to someone that has made a mistake in what (at this moment in time) is (or should be) the most important document in their life.
If they make a mistake like that, what other silly mistakes will they make?
READ: 11 Essential Things Angel Investors Look For in a Startup
2. Incomplete Information
We have an online application form. It is quite comprehensive, and therefore probably requires an hour to complete properly. But the point of it is that it saves us the effort of going backwards and forwards with questions and answers pretty much everything we might want to know about a business during our shortlisting process.
The number of times, though, that an application is left half-completed, and then the entrepreneur asks me why I haven’t reviewed it…
READ: Top UK Angel Investment groups: National and Regional
3. Avoidance of the truth
Just be honest otherwise it will look worse down the line, when whatever it was that you were hiding or exaggerating comes to the investor’s attention. Give the investor all of the information you have, don’t leave anything out, that is the least you can do.
4. Unrealistic expectations
Again, be honest. Be reasonable and conservative. Every entrepreneur thinks they have founded the next big thing, that their business is going to take over the world and that they are going to make billions.
Hockey-stick projections are boring to any investor that has seen more than one pitch in their lifetime. It is much more appealing to an investor if you can describe your steady route to market, strategy for scaling-up and the market potential. It will prove that you are not naïve as well! I can promise you that no matter how great your product or service is, it will not sell itself.
READ: Should You Use Angel Investors For Funding For Your Start-Up?
5. Preoccupation with the product
Often founders are not from a business background. They are scientists, engineers, academics, inventors, etc, etc. And there is absolutely nothing wrong with that, as long as you can prove to investors that you, or someone in your management team, has the capability to think as much about your business strategy as you do your product. You need to be able to sell your product after you’ve built it! Remember, people are the most important aspect to a business angel. Surround yourself with advisors that can fill skill gaps and experience gaps in your management team. Sometimes, the investor might be happy to fill this gap for you, but in order for that to happen, you need to be honest about what skills you are lacking.
6. Arrogance
Sounds obvious, right? But a lot of entrepreneurs act as if they are entitled to investment, that they know everything, and that nothing can go wrong for them. Very off-putting and very wrong. Something always goes wrong and it is more comforting to an investor if the entrepreneur can accept this and be ready for it.
Also, don’t forget that when you invest in a start-up, you are signing up to at LEAST a three-year relationship with the entrepreneur…. Would you want to commit to a three-year relationship with someone that, frankly, you don’t like?
7. Keeping them waiting
Recognise that investors have a lot of other options in terms of what they could do with their money. Do not keep them waiting, they will get bored and give their money to someone else! Make sure that you have everything ready before you start pitching, including legal documents, a full business plan and financials.
Sometimes you have to accommodate their request for your time, despite the fact that you might be busy with other things. You won’t get something for nothing!
READ: How can you connect with investors and win their trust?
8. A silly and non-negotiable company valuation
Many entrepreneurs get stuck on valuing their start-up. Understandably so, because it is extremely difficult to value a start-up business in comparison to valuing an established business. The best thing to do is to look at what similar businesses have been valued at, at a similar development stage, in a similar market.
And then think of your company like a cake… An investor wants to purchase a slice of your cake as he believes that your cake has the potential to become more expensive in the future, and then he will be able to sell his slice of the cake and make a profit. He has a £10 note to invest. If you price your cake at £40 he can buy 25% of the cake. He might well decide to invest his £10 for 25%, if your cake is a beautifully decorated, 3-tier wedding cake… he definitely will not if you have a cupcake!
Either way, you should be able to justify your valuation, and also be willing to negotiate with the investor.
What are the biggest mistakes made by startup entrepreneurs? 7 MORE for 2024!
Here are some more mistakes that startup entrepreneurs often stumble into—missteps that can be as damaging as they are avoidable:
9. Overlooking the importance of a strong team
Entrepreneurs often focus too much on their product, neglecting the team behind it. Investors don’t just invest in ideas; they invest in people. If your team lacks key skills or experience, it’s a red flag. Addressing this upfront is crucial to gaining investor confidence.
10. Skipping market research
Assuming your product will automatically succeed without thorough market research is a dangerous gamble. Investors need to see that you understand the market, competition, and demand. Without this evidence, your pitch might be dismissed as overly optimistic.
11. Ignoring feedback
Some entrepreneurs are so attached to their vision that they stop listening to feedback from investors, advisors, or customers. This arrogance can be a deal-breaker. Investors value leaders who are open to learning and willing to adapt.
12. Lacking a clear exit strategy
Investors want to know how and when they’ll see a return on their investment. Without a clear, realistic exit strategy, your pitch may seem more like a gamble than a sound investment.
13. Neglecting financials
Passion is great, but investors need solid financial projections that show how your business will turn a profit. If you neglect or get the numbers wrong, you risk losing credibility—and the investment.
14. Being unprepared for due diligence
Interest from investors is just the beginning. If you’re not prepared for due diligence—with all the necessary documentation and financial records in place—you risk losing the deal before it’s closed.
15. Underestimating the competition
Ignoring the competition or failing to explain how you’ll stay ahead can undermine your pitch. Investors need to know you’re aware of the competitive landscape and have a strategy to thrive within it.
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