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6 Mistakes to Avoid When You Are Looking for Investment for Your Startup

17/01/2024

In our journey of assisting numerous startups with legal services, guiding them from ideation to the scale-up phase, we’ve observed common pitfalls that, with the right guidance, could have been easily avoided. With this in mind, we aim to provide valuable insights to aspiring entrepreneurs, offering guidance on how to navigate the startup launch successfully. Often when people hear the word “startup” the first thing that comes to mind are companies such as Airbnb, Slack, Uber, etc., which are truly amazing examples of successful unicorns. However, they do not represent the majority, nor the reality in startup world is so good as it might seem. According to the Startup Genome statistics, 90% of startups fail between their second and fifth year of business.  According to the Bureau of Labor Statistics, 20% of startups fail in the first year, 50% within five years, and 65% within ten years. But there are many successful startups, too. So, don’t get discouraged by the statistics!

Ever wondered what those key factors set the few exceptions apart from the struggling majority in the startup landscape? Well, in short, certain mistakes can be frequently seen with startups in their early phases, which unfortunately usually lead to failure. Avoid them, and your startup may be on a good path to falling into the minority group of successful start-ups (and maybe even the next unicorn).

1.Startup Rule No. 1: No Problem, No Solution

Almost every giant, globally known tech startup you can think off started by detecting a problem and figuring out the way to solve it. Here are just a few examples:

  • AirBnB: providing cheaper accommodation. Founders of this startup got caught in a situation where they could not pay their rent, but realized that they had some spare space in the loft they were living in. They decided to sublease those extra rooms, which eventually led them to create one of the most successful platforms for short- and long-term homestays. 
  • Uber: eliminating the unreliability associated with the taxi service. After many times of being late to meetings due to the fact that the taxi had been late or did not show up at all, Uber founder decided to take this problem into its hands and created a ride-hailing company which rapidly became a decent competitor to taxi services all over the world. 
  • Facebook: enabling people to connect online. Until 2004 when Facebook was launched, users of the Internet could basically do anything online – listen to music, read newspapers, but the one thing that was not yet so user-friendly in the online world is the personal contact between people. That is exactly the gap Facebook founders discovered, and as a result, created a social network company with millions of users today. 

As you can see, every successful founder started by detecting a problem relevant to a particular market and coming up with a solution. Even if the problem does not seem large and you feel like there are not many people struggling with it, that is fine – you can start by resolving only one problem for one initial category of users. What’s important is to provide value for someone.

Without detecting a problem to be resolved, the startup journey might seem like trying to climb a steep hill without knowing where you’re going.

Some startups start with a solution and then search for the associated problem. These startups are destined to fail.

2. There Is No Product-Market Fit

In the startup game, forgetting to match your product with what people really want can be a significant stumbling block, often even a fatal one. Even the most amazing products can be a failure if there are no users who are interested in using the features such products offer.

It is possible that you did not even hear about some of the failed products launched by the industry giants, such as “New Coke” – soft drink made by Coca Cola which represented the attempt of the company to outstrip Pepsi when it started to gain popularity and became a threat on soft drinks market. The new drink was supposed to taste more like Pepsi, but it turned out that Coca Cola’s crucial mistake was underestimating its drinkers’ emotional attachments to the brand – they never conducted a survey asking their buyers how they would feel if the original Coca Cola taste changed. The New Coke project was stopped after only 79 days of sale and the old, original formula for Coke, as we know it today, has been re-released.

The New Coke story is a perfect example of serious consequences that can arise out of the lack of research and failure to examine the goal market and consumers’ opinions. Luckily for Coca Cola, they already have established a successful brand, so they were able to recover from this misstep. Unfortunately, that is rarely the case with startups at their beginning, which instead usually face inevitable breakdowns.

In order to achieve the product-market fit requirement, you should undertake two equally important tasks:

  • detect the needs and desired of your targeted users, in order to determine what you should aim for 
  • study the competitors who are in the same industry as you wish to be, to analyze which products or services are already available to the users, along with their advantages and setbacks. Also, competition analysis can help you detect the blind spots, enabling you to eliminate them ahead of time and establish a perfect ground for your idea to grow and thrive.  

3. In Startup Game, Experience Is Gold

More often than not, startup founders are people from the industry, who were able to recognize the problems and shortcomings thanks to their set of skills and knowledge in the field. However, despite understanding the principles of the industry, lack of experience in the startup game usually represents an obstacle that is hard to overcome since the investor might see it as a threat to the success of the startup.

If the members of your core team:

  • are not well familiar with the needs of the relevant market, 
  • know nothing about how marketing activities work, 
  • never participated in selection of employees or building a team, 
  • have zero experience in managing teams, or company in early stages, 
  • do not understand the financial aspects of growing a startup, 

your crew may be recognized as immature for entering the startup arena.

Investors are usually ready to give their trust to the people with a relevant background. This basically means that you are more likely to attract the investors if you are familiar with the good and bad aspects of the startup journey ahead of you, since such experience can be an accurate implication that you will be able to bypass the obstacles, you face during the establishment of your startup and that you have the potential to grow the company.

In other words, only having a great idea is a good start, but when it comes to funding, it is attracted by those who prove they know how to properly use it.  

4. Your Business Model Needs Some Polishing

Your investors want to see a clear and detailed business model, answering their main question: how will the startup earn money and grow?

The purpose of your business model is to define how will your startup succeed and make a profit. To create a proper business model, you first need to define the following:

  • the product or service you are providing. Are you an outsourcing software development company, or you are a SaaS company? Do you sell certain products? Are you in the marketing niche? This first item on the checklist should be relatively easy to define, bearing in mind that the answer to this question naturally arises from the idea that motivated you to go into a startup business in the first place. 
  • your target audience. Will you provide B2B or B2C services? If you are establishing a B2B startup, are you aiming for small and medium companies, or your product/service is intended for large companies? Defining who you are targeting enables you to further shape your service or product.

For example, if you are developing a business time tracking program, you are probably trying to attract more entities and less individuals. On the other hand, that is usually not the case if you are developing an app enabling the user to create a personal workout plan, since such apps are usually intended for individuals. Based on the target audience, you will be able to define more details of your app, starting from the features to be included, all the way to the appropriate price of your service.

  • the source of your startup’s revenue. Are you planning on receiving one-time payments for the sale of your product, pay-as-you-go payments, or subscription payments on a monthly basis? Will your main revenue stream be the single product or service you are providing, or you will have multiple sources of income? 

For example, will your profit originate from the sale of your products, or you will mostly earn through digital advertising?

If you draft your business model appropriately and pitch it you your potential investors, eventually they will understand how you are planning to make a successful startup and wish to join you on this journey.

5. You Have No Idea How to Attract Customers

Despite the quality or the attractiveness of your idea, at the end, investors want to hear what is making your startup different than the other, existing ones.

What are you offering that no one else does? 

How do you plan to attract your users?

Even more importantly, how are you going to retain them?

This topic also includes the comprehensive analysis of the competition, as well as of the relevant market. It’s simple: in order to make a service that will provide value and satisfy the users’ needs, you need to ask them what they need. This can be done by conducting an official market research, or testing your product with relevant participants in the market you wish to enter.

Whichever way you choose to do it, you need to be aware of the needs of your target customers, and then come up with a precise plan how are you going to help them.

For instance, if you plan on selling clothes through an online store, you will probably be more appealing to the users if you: 

  • implement the payment system that is fast and user-friendly, 
  • ensure there is a beneficial and simple return policy, 
  • grant certain loyalty programs for the returning buyers.

Just assuming that the customers will be attracted to your product without any effort will most likely take you nowhere. For that reason, make sure to draft an adequate customer acquisition strategy and marketing plan, as well as the projection of the further development of your service and your preparedness to comply with the market’s requests. Not only that your investors are going to ask you about this, but you will additionally create a much clearer path for your next action steps.

Being a startup founder is not easy. At the beginning, it seems that all you need to do is to come up with a good idea, but just later you realize that that is the moment when the real adventure begins – in both a good and bad way. However, dodging some rookie mistakes is sometimes sufficient as a first step towards success, and hopefully after reading this brief guide, you will be properly prepared for jump into your next business venture.

6. Your Pitch Perfect Is Not So Perfect

As Benjamin Franklin once said, by failing to prepare, you’re preparing to fail. If you want to get the investors on board, you need to get their full attention first.

One thing no investor will forgive you of is a lack of preparation for the pitch and poor pitching skills. The mere reason for organizing a pitch is to examine whether you have a clear vision of your idea and action step plan to make it come to life. Not thinking through what you are going to say before meeting with potential investors usually leads to not being able to convince the investor to support your idea and failing in your attempt to get funding.

With that in mind, you should strive to make your pitch as intriguing and amusing for the investor as possible, which can be achieved by: 

  • making your introduction intriguing and personal – the chances for your potential investor to become interested in your idea is to tell a story about it and make it as personal as possible. If your idea is inspired by the problem you have experienced, share it with the investors and likely they will see the depth of the solution you are proposing. 
  • emphasizing how your startup will change the world – you do not have to aim for the entire world but do your best to show that your idea will have a significant impact in a certain area. 
  • explaining the execution of your project – for investors, it does not matter how good your idea is if you do not have a vision of how it is going to be achieved. Therefore, make sure you make a clear plan of action steps which can be easily presented.  
  • staying engaged – staying present and actively participating during the entire pitch may seem unnecessary to say, but sometimes it might be crucial for developing good initial communication with investors. Don’t hesitate to show your passion and faith in your idea and keep a positive attitude during the entire pitch – you might be surprised how contagious good energy is. 

Another mistake you should never make is to go to the pitch unprepared for the potential investor’s questions. Although the pitch is mainly intended for you to introduce the idea, interested investors will probably have some additional questions for you. So, be also prepared for a discussion as well, besides the presentation. 

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