Raising Capital: Common Mistakes First-Time Founders Make

When tech operators decide to start their own company, they often decide to raise capital for the first time. Learn from a few common mistakes to hopefully increase your odds of success.

The bar to raise capital now is much higher than it was during the ZIRP era. It’s harder for VCs to raise capital from their LPs, which means there is also less capital available for founders.

While the stories you see in the news are about founders who have been successful in fundraising, there are countless others who have not been able to make it through the process. Below are a few common mistakes we see when first-time founders are starting to fundraise. We hope this helps you understand ‘how VCs think’ to increase your odds of success. Note: The tips below are generally for founders raising their first round of capital, often called a pre-seed or seed round.

Common Mistakes in Fundraising

1. Not Understanding Venture Math

Venture Math dictates that a few investments will return almost all of the capital within venture capital. The stats are staggering. Something like 2.5% of investments return 60%+ of capital. VCs are not really interested in acqui-hires, small exits, or just getting their money back. Early-stage investors, especially, are hoping that each investment will have a chance to 50X or 100X+ their capital, and they want each investment to ‘return the fund.’ Investors need to invest in hyper-growth businesses or businesses that will one day reach hyper-growth. As a founder, your job is to make it easy for them to understand how your business will be massive.

2. Assuming They Will Get Funded Quickly

While working at a top company or having a specific degree (cough cough AI PhD) will often help you get your foot in the door and secure a meeting, it’s not enough to get an investment from a VC. Your background can get you noticed, but your vision and execution plan will secure the funding.

3. Presenting an Unprepared Deck

The bar for having a good deck is high. A deck is part of your sales process and a window into how you will approach branding, marketing, and sales for your startup. Everyone reads stories about people raising billions using just a memo, but that’s the exception. To understand what a great deck looks like, try to look at as many decks as you can. Ask founders who are one step ahead if you can see their deck or join a syndicate group on AngelList where decks are regularly shared.

Investors look at thousands of opportunities per year and will glance at your deck for about 15 seconds on their phone. It needs to be very easy to read and impactful, which is easier said than done.

4. Lacking Design Partners

One method to de-risk a business and prepare founders for fundraising success is to sign up design partners before raising any capital. Design partners are initial customers who are so invested in solving the problem you’re tackling that they are willing to partner with you before you have any product at all. They agree to meet with you weekly and essentially co-create the product with you.

Startups I work with recommend using Common Paper to get these partnerships in writing. Having this commitment from your early customers shows VCs that you’re able to sell and that you’re solving a painful problem for an initial set of users.

5. Not Spending Enough Time Talking to Potential Customers

Founders sometimes focus their pitch and deck on the product they are building, thinking it’s a brilliant idea that will sell itself once built. This is often backward thinking. Founders often have the most success when they spend the first 6-9 months of company development interviewing as many potential buyers as possible, using a framework like The Mom Test, to really dive deep into their pain points.

This customer discovery and ideation process is a learned skill and something that second-time founders often focus a lot of time on on. When pitching your pre-seed startup, take investors on your journey about how you came to the specific problem you’re solving. Include a slide about your ideation process, ideally showing you’ve talked to 50+ potential customers, and include quotes about how big the problem is for them.

6. Not Seeking Enough Feedback

As a founder, your job is to create a very large and successful company. However, once you become a Founder & CEO, strange things happen—you no longer have a boss or anyone to tell you what to do.

When in a position of power, you need new methods and channels to get feedback. VCs and friends may not give you ‘real’ feedback unsolicited because they do not want to offend you or reduce the chance of future interactions. This also happens with employees who don't want to risk their jobs.

As a founder, you need to always be a TRUTH SEEKER. Tell everyone upfront that you want their real, most critical feedback. Another way to ask for feedback is by saying, “What would you do if you were in my shoes?” Not all feedback will be good or accurate, but it’s still helpful to understand what people are thinking since it drives many downstream actions.

7. Building a Company in an Unexciting Area

Investors also consider market potential when thinking about whether a company will 100X. Many believe that investing in growing markets helps create extraordinary outcomes. Right now, everyone is obsessed with AI. If you’re not including AI in your pitch or thinking about how it will impact your business, investors may think you’re out of touch.

Some investors do extensive research on specific areas and then seek out companies in those areas. Others look for something exciting to talk about and ‘sell’ to their internal partnership to get approval. Similar to sales, you need an advocate within a VC firm to fight for your funding.

8. Misinterpreting a VC Meeting as Interest

One part of a VC’s job is to ensure they talk to many founders so that they get a chance to look at investment opportunities when rounds come together. VCs might look at a thousand potential companies in a year and invest in only 2-3 of them. After a meeting, you’ll know if a VC is interested because they quickly follow up and want you to meet their partners. If they are not interested, they may ghost you or be slow to respond.

9. Trying to Raise Too Much Money

Decide how much money you want to raise before you go to market. This will impact the types of funds you talk to during your process. I sometimes see founders try to raise $5M+ instead of first trying to raise an angel round (~$500k) or $1-2M to get going. It’s generally better to set a lower goal and exceed it than to lower your target.

Investors will want to understand your high-level plan for how you will spend the money and the milestones you expect to reach with the funds.

10. Not Understanding the Work Investors Do

When investors decide to invest, they often do quite a bit of work behind the scenes. This typically involves writing an Investment Memo shared with their partnership during the approval process. This includes writing about your strategy, team, market size, competitors, traction, etc. They also likely talk to both on-list and back-channel references. The most famous memo is the Sequoia memo about YouTube.

Final Thoughts

Raising capital is about finding investors who truly believe in you and your business idea and who want to partner with you for the long haul. If you anticipate getting rejected 99 times out of 100, you’ll go into the process prepared to be resilient and keep moving forward.

What am I missing? Do you agree or disagree? Feel free to add your own tips as well.

At Trail Run Capital, we help experienced operators at the ideation stage of starting a company, often prior to raising any capital. Send us a note at allison@trailruncapital.com if you’re starting something new or are thinking about it.