12 Traps to Avoid When raising for a purpose driven start up
But if you’re new to entrepreneurship (and even if you’re not) it’s easy to make mistakes, especially when raising; we’ve seen entrepreneurs with incredible potential fall at the very first hurdle.
Most of the advice out there are for purely commercial businesses but there are often a few extra bits that purpose-driven investors are specifically looking .
So, in order to give your company the very best chance of securing that funding, we’re letting you in on the pitfalls we’ve been witness to, so you can learn from them, avoid them and make a brilliant impression.
Pitfall #1: Not actually describing the product you’re raising for.
You’ve told us about yourself, your background, your hopes and dreams and you’ve even outlined the sticky problem you’re solving. But you, er, haven’t described how you’re going to do it. Or you’ve named the product, but you haven’t explained what the features are that make it so special. Make sure the investor is 100% clear on what they’re putting their money into, not just why.
💬 Extra tip: include a demo or video that makes it super clear what you are doing
Pitfall #2: A lack of research into the problem.
It’s no secret that many founders create products that solve a problem that they’re experiencing. That’s a great starting point but isn’t enough to prove there is a real problem. Investors want to know that potential customers have also struggled to find a solution to your issue.
Dig around for some really compelling research which backs up your hypothesis. And if it doesn’t exist? Interview people, send out surveys and create your own bank of data.
💬 Extra tip: link or reference any external evidence that you are citing
Pitfall #3: Not involving your target market in the design
Stakeholder engagement is important to many investors putting their cash into social business. Why? Because if you want market fit, the most efficient and effective way to achieve that is through co-design, or consultation with the people you hope will be your customers.
Social investors, particularly trust and foundations, are very keen on co-design and it will really boost your credibility.
Pitfall #4: Not knowing your pitch off by heart
Simply put, if you want to inspire confidence in your investors, make sure you sound confident during your pitch. Rehearse your pitch until you’re reciting it in your sleep. Knowing it off by heart will show investors you’re knowledgeable and prepared, and someone they can trust with their money.
Pitfall #5: Hockey stick projections
A ‘hockey-stick’ projection is where your income grows steadily for a few years and then BOOM it rockets upwards in years three and four.
This rarely happens in any business and in the social impact space it’s even more unlikely. Hockey stick projections are a very quick way to lose credibility in this space so it’s better to show steady growth rather than a sudden explosion.
💬 Extra tip: remember that costs will go up every year as you expand. Pretending that you can exponentially grow income without impacting your cost base is delusional
Pitfall #6: An unrealistic marketing plan
The same goes for your marketing plan. The amount of times we’ve heard of founders just planning on paying for a load of Tube station ads and not much else. If you don’t have the marketing skills yourself, ask for help in order to make your awareness planning both cost effective and highly targeted.
Pitfall #7: Unrealistic valuations
Are you sensing a theme? A lack of realism can make you seem inexperienced and risky, and nowhere is this spotlighted more than in your valuation prediction. On average, a pre-seed valuation is £1.5m. If you’re valuing your company above that, make sure you’re able to confidently justify those figures.
Pitfall #8: Unresearched proxy markets
If you know your target market can't afford the full cost of your product or service, a Proxy Market Strategy (eg. selling the product to councils or companies) could be a great way to raise funds to support more vulnerable communities.
However, proxy markets aren’t guaranteed money spinners - make sure you can demonstrate they also truly want your product.
Pitfall #9: A weak defensibility strategy
Could someone just copy your product tomorrow? What would stop a big corporation from reproducing your service? Whether it’s your IP, your network, your years of research or your access to target markets, it’s imperative that you know your business’s unfair competitive advantage. Otherwise you’re just providing those with deeper pockets your ideas for free.
Pitfall #10: Unoriginal ideas in a saturated market
It might sound obvious, but have you researched whether your product already exists? Are you planning on entering a market so saturated that only the most original and the best succeed? OK, then work out how you can be the original and the best, and make sure to communicate that to your investors.
Pitfall #11: Spamming investors
Here’s a mistake we see all too often- entrepreneurs spamming investors rather than using a tactical, selective approach. Investors (if not everyone you contact!) will want to know why you chose them to talk to. Make sure you do your research and send personalised and sector-appropriate intros only - thereby avoiding a bad reputation and a lack of funding.
Pitfall #12: Not selling you (as well as your business plan!)
Here’s the truth: your business plan will probably go wrong at some point and you will have to pivot. But that’s actually fine! Investors are not solely backing your business plan: they are backing you to solve a problem for a particular group. They want to see that you really understand the community you are trying to serve and the problem you are trying to solve. Don’t forget to sell yourself in the deck - not just the business.
Hopefully you found that list useful! Navigating the fundraising landscape is tricky, especially when you're driven by a purpose beyond just profit. Armed with the knowledge of these common pitfalls, you're now better equipped to steer clear of them and move closer to your funding goals.
We're keen to hear how you apply these tips to your own startup journey. If you've got strategies that worked, challenges you overcame, or even a new pitfall to share, hit reply and let us know!
Good luck, and here’s to turning potential pitfalls into stepping stones for success!
Jem and the team at Daring Capital
Investors talking at a Daring Capital Business Showcase