Venture Capital funding is the holy grail for many startups. It turns dreams into reality. It also provides a runway for young companies that want to scale. However, securing funding is complex and precarious when growing a business. Finding VC support is rife with false starts, pullouts, and miscommunications, especially for inexperienced entrepreneurs. It’s a cutthroat world. Without expert guidance, Venture Capital funding mistakes can ruin a burgeoning organization. But get it right, and it sets a company on the right path to success.
As a former top Wall Street tech analyst and the founder of two Indian unicorns (online marketplace ShopClues and automobile marketplace Droom), I know these funding pitfalls well. I witnessed many of these pitfalls — and they happened to me.
Firsthand Funding Mistakes in Tech
There is no replacement for firsthand experience. But I also could have avoided some Venture Capital funding mistakes if I had known about them beforehand. So here I’ve created a list of missteps and how you can recover from them, as well as problems that were not directly my fault and how I navigated them.
I hope this advice is helpful to you on your entrepreneurial journey.
One in the Hand is Worth Two in the Bush
Venture Capital funding mistakes will happen. There is no way around this truth. That’s why it is essential to do your due diligence beforehand. But prepare for missteps.
For example, when I decided to launch ShopClues from my Silicon Valley apartment, I was able to secure a $1.4 million commitment in a matter of weeks from eight of my closest friends. The money was a godsend. It allowed me to launch my company right away. Or so I thought…
Shortly after raising the financial commitment from my friends, I happened to meet one of the most elite VCs in the world by chance. He liked my idea, and he liked me. The VC convinced me to spend multiple fundraising cycles with him instead of taking the $1.4 million. He said I would most definitely need more capital down the line. After two months of back-and-forth, he gave me a term sheet for $5 million. He also told me that getting a term sheet from him equaled receiving an admission letter from Harvard. I thought I had officially arrived.
At that time, I had already onboarded two other top team members. They expected to move to India with me to launch ShopClues. After the term sheet, everyone’s moving date and confidence became more aggressive. But there was a problem. While we had the term sheet, nothing progressed with the VC. I had just convinced two families to take a considerable gamble moving to India based on stalled funding.
I called the VC and told him I needed a clear answer — yes or no — about his funding. There were too many families whose lives hung in the balance. But, unfortunately, the answer was no. In an instant, my Harvard admission letter vanished. I had to act fast.
Making Quick Decisions
First, I asked my team to move to India while I stayed in the US to secure any funding that I could. Then, with hat in hand, I went back to all of the investors who initially offered me $1.4 million. I was very lucky; not a single investor said no. During that time hustling up funds, I also secured another $550,000.
In short, until the ink is dry on the contract, promised funding is no funding at all. So it’s better to go with the funding you have versus the money promised. In an instant, an entrepreneur can be scrounging for more money. And do not be afraid to apologize to those you’ve wronged.
Prepare for Valuation Surprises
That funding adventure is enough to give many entrepreneurs a panic attack. But it was not the only time I got a funding surprise from an elite Venture Capitalist fund. During a Series A round, a different VC gave me a term sheet and all necessary documents. As we reviewed the documents and planned our next steps, the VC came back to us at the 11th hour and said our valuation was way too high. Our well-laid plans disappeared immediately.
It’s important to anticipate these differences in valuation. They will happen, and entrepreneurs look unprepared if caught flatfooted. For this reason, I had other investors ready. I quickly pivoted, renegotiating the terms with a slightly lower valuation that also included a lower stake for that specific VC.
This clawback kept both sides happy. It also allowed me to find additional funds that gave my first five team members a material Employee Stock Ownership Plan (ESOP) instead of allocating this money to these investors. It’s always worthwhile to support early-stage employees. They are taking a massive risk to bring your vision to the world.
Entrepreneurs Occasionally Get “Ghosted” Just Like a Bad Date
A year after I founded ShopClues, I received a term sheet from a prominent VC via email. Initially, the VC was very aggressive and seemed passionate about working with us. This is the dream: finding VCs who match a startup’s energy with their own enthusiasm. Needless to say, we were excited.
However, this dream quickly became a nightmare. After multiple follow-ups, it was clear that the actual term sheet and deal-closing documents were never coming—months of effort for nothing. We were “ghosted” by a potential funding partner. It was like a bad date.
By this point, I had been pursuing and securing funding for two years. This new lesson was important: VCs can vacillate between rabid interest and ignoring a startup. Do not take it personally. Vet each funding opportunity on its own merits. By diversifying funding sources, entrepreneurs mitigate the sting of being ghosted. Funding will never be easy, and the process never progresses in a straight line.
Embrace Financial Constraints
More often than not, startups that begin with a lot of promise fizzle out quickly. Then, after back-to-back rounds of fundraising, these once-promising businesses receive positive reception from consumers. They also secure strong media coverage. During this honeymoon period, it seems nothing will go wrong.
But this is a false sense of security. When everything is going right, a significant problem hides in plain sight: massive cash burn. Millions in VC funding feels like it will last forever. But time and time again, startups prove they know nothing about financial planning. Busted businesses that wasted their VC funding litter the tech industry.
It is absolutely critical to seize the consumer market, but not at the expense of financial instability. Entrepreneurial leaders must pay heed to the financial constraints of their companies. This means reining in spending to ensure survival, sustenance, and success. The old adage “penny wise, pound foolish” hides kernels of truth. Finding the balance between frugality and knowing when to spend big is extremely important for a young business with outside funding.
Do not be afraid to seek external consultation if internal financial planning knowledge is lacking. Execution laser-focused on numbers is paramount to creating a scalable business. If you’re spending too much VC money right now, make painful cuts immediately. Please do not wait until it’s too late.
Realize There are Things VC Funding Cannot Buy
As an entrepreneur, there is always something to learn. All of these lessons have an immense, oversized impact on employees. They also affect a business’s place in the market at large. This is stressful, painful, exciting, and anxiety-inducing — often all at once. I learned to weather volatility and uncertainties. These attributes made my business more resilient. However, they also brought a number of factors into sharp relief. For example, VC funding cannot change the most critical aspects of a company’s success. What a game-changing realization!
Vision, obsession, and eccentricities cannot be bought. They are not transferable. Entrepreneurs sometimes get stuck thinking that money solves all problems. But an imperfect employee with a strong drive and unique outlook cannot be replaced. Running a startup is never a straight line. Murphy’s Law lurks behind every corner. Knowing that a hand-assembled team supporting an entrepreneur’s vision is ready to get its hands dirty when Venture Capital funding mistakes are made is priceless.
Do Not Relinquish Control for Additional Funds
Years of hard work, brainstorming, dead ends, and successes built your business. But, while outside funding most definitely helps pave the road to success, it can also put you on the road to ruin.
A VC deal that sounds too good to be true often is. Do not trust anyone with 100% of your vision. In short, never relinquish full control of your business to an outside entity.
Professional investors do not always have a company’s best interests in mind. Business leaders trust these VCs to bring them wealth. But not all of these professional investors have the passion, commitment, and dedication to match entrepreneurial drive. In fact, they may take for granted what an entrepreneur has built. Some of these VCs also have competing interests or petty grievances between themselves.
A company can spiral out of control if it gets caught between the childish in-fighting of its outside funders. Watch for these issues when speaking to unknown VCs.
Leave Your Entitlement at the Door
When everything seems to be going right, even the most even-keeled businesspeople grow an ego. It’s just human nature. However, entrepreneurs must work hard to avoid a sense of entitlement at all times. Ignoring this advice is one of the worst Venture Capital funding mistakes.
For example, graduates from prestigious academic institutions often carry a misplaced sense of entitlement. This can be detrimental to their success. But, on the other hand, these fresh-faced entrepreneurial hopefuls believe that having a certification from a high-profile institute automatically results in investor interest.
An excellent academic track record certainly impresses those mapping your progress. However, the ultimate litmus test of entrepreneurs is the strength of their ideas and the ability to execute those ideas profitably.
People often mistake overconfidence as solid leadership. However, it usually ends up cementing an image of arrogance in the eyes of colleagues, peers, juniors, and VCs. It’s also a huge turnoff for potential investors. These VCs are not just funding your idea. They are also funding their belief in you. Reputational damage sets those seeking funding back to Square One, so check your ego at the door.
Funding is Not All that Matters
Funding is one of the most critical aspects of a burgeoning startup. However, you can be fooled and blinded by the money itself. Securing capital for your venture is important, but the ability to spend it wisely is equally critical. Make every penny count by ending lousy spending habits. Do not splurge on trivial things that do not benefit the company in the long run.
Personally, I believe splurging is as unwise as it gets. But I’ve learned this lesson the hard way. I’ve experienced tunnel vision before. Unfortunately, it negatively affected important parts of my business.
Spend time understanding the current market thoroughly before planning to allocate VC funds. Many relatively new businesses fail due to improper fund management, despite having raised significant amounts of capital.
Extravagance to “seem” successful is the single worst mistake an entrepreneur can commit.
Treat VC money like your own — and carefully and shrewdly divvy it out. Then, use data and shrewd analysis to figure out the best ways to utilize it. Possible options include strengthening infrastructure, growing your team, and expanding the company’s geographical presence in a well-thought-out, calculated, and measured way.
If you burn money for the wrong reasons, hire an intelligent CFO who can speak the truth to power. They will keep the company on the right track.
I feel blessed to have launched two successful Indian Unicorns during the past decade. But I’ve encountered my own share of VC challenges.
I hope the Venture Capital funding mistakes I’ve made help other entrepreneurs on their VC funding journeys. There is no one right way to do it. However, the wrong way can turn a little mistake into a big problem.
Be prepared, be flexible, and most of all, be resilient. When wooing Venture Capital firms, find the best match between vision and a fruitful funding partnership.
Image Credit: RODNAE Productions; Pexels; Thank you!