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3 Fundraising Mistakes First-Time Startup Founders Make

Hint: Cash isn’t king. It’s all about relationships.

3 Fundraising Mistakes First-Time Startup Founders Make
[Photo: Goldenarts for Shutterstock]

When founders realize that they need to raise money, many react like someone falling backward off a cliff: They find whatever’s in front of them and grab on like hell. The lure of instant cash and fear of the unknown distort founders’ vision, so they begin to treat their relational networks like a series of slot machines to be pulled. Know which machines pay out, discover the right ways to play, and eventually you’ll hit the jackpot.

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When their immediate networks turn up empty, or if they’re too ashamed to ask people they know to invest their own personal savings, many founders start looking for institutional money—venture capitalists, bankers, and established funds. Although a very small percentage of startups meet the criteria for this kind of financing, many founders seek them out because they’re so much more visible, the process for applying appears straightforward, and there’s a certain aura of cool that comes from “going out for VC.”

Months later, having been strung along by a half-dozen responses like “come back to me when you have a lead investor” and hundreds of unanswered emails, the founders fold their hands and admit defeat, telling themselves that it just must not have been the right opportunity, never realizing they were toast from the beginning.

Lost in the moment, founders can often get caught by three seemingly obvious snares during what’s known as the “road show”—the weeks, months, or years an entrepreneur spends raising money.

Mistake No. 1: Prioritizing Cash Over Relationships

Many entrepreneurs assume that money is the most important resource their venture needs. It is actually relationships—the vital connections between the right people who have the right resources—that have the greatest impact on a startup’s chance for long-term success. Cash burns up faster than you can imagine, but reputation endures. Cash is likely to be the least valuable asset you accrue on a road show.

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Mistake No. 2: Assuming All Money Is Good Money

Entering into a relationship where an investor gives you cash in exchange for ownership in your business is like getting married. That marriage may come with access to new information, industry expertise, or supplier, distributor, or partner relationships. It also may come with burned bridges, control issues, or misaligned incentives, so knowing which investors bring what to the table in addition to money should determine which people you pursue.

Mistake No. 3: Mismanaging Relationships

Some startup entrepreneurs can be terrible stewards of the relationships people offer them. Everyone loves connecting one world-class person to another when it’s a gift to both parties. Who wouldn’t want to be the person who introduced someone to her next cofounder, or the entrepreneur who made his next $10 million? On the other hand, nobody wants to be the one who introduces someone to the flaky know-it-all who stands people up. Mishandling a well-placed introduction makes everyone look bad.

Even though there are a few simple things you can do to leave a lasting positive impression on someone who helps you, few people learn to take advantage of them. There’s a better way.

Getting It Right

Rather than seeing every high-net-worth individual or firm as a bag of money, entrepreneurs should build relationships with investors whose involvement would be mutually beneficial. They can create such rapport and excitement among those they meet that others will go out of their way to help them.

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Cash isn’t king; friendship is.

This shift in approach creates a “friendship loop,” which starts with taking stock of your personal social graph—who you know and how much access you have to the things and people your startup needs.

Starting with the people you already know, you then bridge to new social networks by asking for introductions to people they know. Then you build trust through those new relationships, delight people with gratitude, and invite them to participate in your venture by advising or partnering, introducing you to others who can help you, or investing.

Intro, build, delight, invite—repeat. That’s the loop.

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Reprinted by permission of Harvard Business Review Press. Adapted from Get Backed: Craft Your Story, Build the Perfect Pitch Deck, and Launch the Venture of Your Dreams. Copyright 2015 Evan Baehr and Evan Loomis. All rights reserved.