Startups: Avoid These Mistakes When Raising Capital

An article we liked from Cake:

7 Capital Raising Mistakes a Start-up Should Avoid

If you’re an early stage start-up looking to start capital raising, it is an exciting time.

You have that rapid growth in sight, and you just need those juicy funds to help you to take the next leap.

However, the capital raising process can be a tricky one, especially if you’ve never done it before.

Fast and Loose

While ‘fast and loose’ is a pretty common (and admittingly, proven) approach in the start-up world, it can actually come back to bite you in the capital raising context.

How so, you ask?

The main time you will see these mistakes become obvious, is in a later due diligence (DD) by a large investor in a later round.

If you get through a ‘fast and loose’ raise, it may work for the short term. But when an experienced investor or VC comes along for a later round, with a bunch of money on the table, they are going to want to see how you’ve handled things leading up to their investment. They want to make sure they’re not investing in a company that has cut corners, and could therefore be liable for regulatory fines or shareholder actions later on.

Basically, they don’t want to invest in a company that turns out to actually be a bit of a structural mess! If any cut corners don’t scare them away completely, it can definitely lead to the suggestion of a lower valuation. Or if nothing else, it might just be a really embarrassing conversation, and a solid knock to the investors’ faith in the founders.

Below we’ve summarised a few basic errors that we see early stage start-ups make in their first raise, and suggestions for how to avoid them.

If you need any help, just let us know, and Cake and its start-up focused partners can assist.

1. Share Split

This is such an easy one, but one that so many founders put off for no good reason.

A split is needed where the company only has a small number of shares on issue.

For example, a Company could split 200 shares on issue into 20 million. As a result, each share will be worth less, but the Company will be able to issue more shares with less dilution effect. This can allow a Company to...