Busting the Common Myths on Early-Stage Startup Fundraising

I recently met an optimist startup friend who believed that getting angel investors to back her idea was the easiest thing ever. After going through the strenuous process of validating the “next big thing” that she started some months ago, the conclusion she made was, “it works”.

Bringing in a steady flow of revenue, she decided to take it to the next level but any idea or strategy that popped, required capital, kickstarting a whole new chapter in her venture. After a few months of struggle, she gave up on raising seed funding and moved back to her bootstrap mode.

In my humble opinion, seeking capital for scaling the operations are unchartered waters that leave no stone unturned to test your mettle. The stakes are so high that one wrong move creates a lot of turbulence affecting the health of your company. Finding the right angel investors does have a lot of science behind it but it’s no rocket science.

At Chandigarh Angels Network, we evaluate hundreds of fundraising applications each month. This article addresses the common myths a Startup entrepreneur should keep away from in order to increase the chances of raising funding for her startup. 

Myth #1: Angel Investors back passionate founders without proven actions

There’s a conventional belief strongly withheld both by investors and entrepreneurs that passion is a positive attribute, expressing high energy, perseverance and commitment. It surely is but the passion without proven actions is nothing but a fad.

An analysis of an MIT Entrepreneurship Competition by an assistant professor of entrepreneurship at Babson College suggests otherwise. Her study reveals that all the finalists of the competition didn’t express any traits of passion when pitching to investors. Rather most of them had a calm demeanour. People equate calmness with strong leadership strength.

When your passion for your startup can be calmly expressed through your actions, words don’t matter.

Tip #1: So next time you go for a pitch, drop your words of passion and have a stone cold preparedness supporting your actions.

Myth #2: Premier college degrees alone lure investors

Look around for the funded startups- the majority of those funded are founded by founders with premier college degrees. But it is not the only influencing factor to make or break the investors’ decision- there are many more factors to it.

Angels take a huge risk with their capital by investing into the Startups- which is why they’re called angels in the first place. For any angel to potentially consider investing in a high-risk venture, the trust you build during your interactions outweighs any competencies you might possess.

I have seen angels giving preference to the character of a person, ability to adapt, decision making in the adverse circumstances etc over any skill-based competency which can be acquired through training or by hiring human resources.

The premier college degrees alone do not lure the angels.

A degree from IIT, IIM, Wharton or Harvard can anyway never guarantee a startup’s success.

Tip #2: Project honesty and your truest character to heighten your chances of getting funded by as much as 10 percent, a study suggests. 

Myth #3: Feedback is for amateurs

I know a few things in life are not easy to digest; parents love their baby and so any negative comments on the baby trigger their emotional side.

The startups are literally treated as babies by their founders. But founders need to understand that it’s the investors’ money and they have all the rights to share their opinions.

On the flip side, a lot of Startups pitch to investors just for getting their feedback to validate their assumptions. Angels are usually seasoned entrepreneurs who bring a great degree of experience to the table for startups to learn from.

Being receptive to constructive feedback makes you a potential portfolio addition for them.

Tip #3: Fact that you are open to constructive feedback shows your receptivity to change and makes your company more likely to be moved to the next steps. 

Myth #4 High traction always guarantees Investment

Traction is the validation of your business model shown over the time and often measured by terms like paying customers, revenue, app downloads, active users, repeat orders etc.

Though a disruptive idea can help get you eyeballs, having validated traction has always been perceived as a prerequisite for angels to consider your case seriously.

Having said that, even a good amount of traction never guarantees the angel investment for your startup. The founding team’s skin-in-the-game steers the ultimate decision making of the angels. A research unveils that an average investor responds strongly to the founding team, but not so much to the startup’s traction. So, traction undoubtedly is an important measure of a proven business model but not the ultimate deciding factor.

Tip #4: Your core team’ s understanding of the business and commitment is much more important aspect than the strong traction alone. Make sure you invest time in planning the right way to present your core team strongly during the pitch to the angels.

As an ending note, fundraising for a startup is a full-time job for founders. It may take 3 to 6 months of your dedicated efforts and it’s common to hear a No repeatedly before getting a Yes.

Ask yourself these questions before starting to fundraise:

1. Do I have the appetite for repeated rejections?
2. Do I have consistent cashflows and enough runway to sustain the business while fundraising?
3. Who is the best person amongst the founders to focus independently on raising funds?

Getting a “No” from the investors is hard to accept but it should not be taken as a full stop. The founders ought to define their own milestones, work on to achieve them fast and write back to the investors periodically about the progress they make.

Did you have any myth about fundraising that went bust when you walked down the funding street?

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