Top First Time Founder Fundraising Misconceptions

Raising your first funding round can be daunting as a first time-founder and certain "logical" steps might be in fact mistakes. In my years of experience as an investor, I've seen several misconceptions repeated that often lead to missteps.

Let's demystify some common myths and set the record straight.

1. If they have a similar portfolio company, they are likely to invest.

At first glance, this makes sense—why wouldn't an investor want to back another company in a sector they understand well? However, the reality is more complex. Investors may avoid companies too similar to their existing investments to prevent internal competition. Instead, they might seek complementary technologies or different markets within the same sector. It's crucial to research an investor's portfolio thoroughly and understand their strategic focus, and if they have invested in a company that is very similar to yours (market and product/problem focus), they are likely to pass.

2. If the investor has given a term sheet, it’s as good as money in the bank

Receiving a term sheet is amazing! But it is far from a guaranteed investment. Term sheets outline the basic terms and conditions of a potential investment, but they are subject to further due diligence and negotiation.

Many deals fall apart during this phase due to discrepancies uncovered in due diligence, disagreements on terms, or shifts in investor priorities.  

You should continue your fundraising efforts and not halt all other conversations upon receiving a term sheet except there is a specific clause that prevents you from doing so. In this case it is usually that you cannot have new conversations, not so much that you can't continue existing ones.

3. An investor reaches out; they are likelier to invest.

While inbound interest from an investor can be exciting, it doesn’t necessarily indicate a high likelihood of investment.

Investors often cast a wide net to explore opportunities and gather market intelligence. Many reach out to learn more about an emerging sector or to benchmark against other companies.

Gauge the seriousness of the interest through subsequent interactions and the depth of the investor's engagement. Ask questions to understand what specifically about your startup caught their interest, how active they are e.g., last investment etc.

4. If a junior member of the investment team reaches out, it’s a waste of time

This misconception can lead to missed opportunities. Junior team members often serve as the first point of contact and play a crucial role in the due diligence process. They are tasked with sourcing and vetting deals, and their endorsement is often necessary to bring an opportunity to the senior partners' attention. Many have gone on to champion deals giving th right information that get the decision makers over the line.

Engaging with junior team members thoughtfully can help founders gain advocates within the investment firm.

5. Don’t accept small checks - make your minimums higher as a filter for serious investors

While it’s tempting to set high minimum investment thresholds to filter out less committed investors, this strategy can backfire.

Smaller checks can come from angel investors, syndicates, or strategic partners who can add significant value beyond capital, and at the earliest stages you need all the support you can get. Optimise for investors who can get their hands dirty and help you where you may need, whatever the check size.

These smaller investors can also create momentum and validation that help attract larger investors. Flexibility in the early stages can be advantageous.

There is a valid concern of having too many "small cheque" investors on your capable you can solve for this by rolling all checks beyond a certain size into an SPV roll-up vehicle. Several platforms like Angelist, Sydecar, Odin have made this super easy.

6. Fundraising can easily be balanced with operations; it won’t seriously affect metrics.

Fundraising is an all-consuming process that demands significant time and energy from the founding team. This diversion of focus can lead to dips in operational performance and key metrics. Don't underestimate how much of your time it may take. Be prepared for this reality and consider bringing in additional operational support or delegating responsibilities to ensure the business continues to run smoothly during the fundraising period.

7. Hiring a professional advisor to fundraise for you will lead to more success

While professional advisors can provide valuable guidance and connections, they are not a silver bullet.

Investors typically prefer to engage directly with the founding team to assess their vision, passion, and competence and having an external advisor lead your fundraising efforts is often considered a negative signal in the investor community.

It can be perceived as a lack of commitment or capability to investors - founders need to know how to sell. Fundraising I selling. Strike a balance by using advisors for strategic advice while maintaining direct relationships with potential investors.

8. Secure your lead investor first before trying to fundraise for the rest of the round

Conventional wisdom suggests securing a lead investor first to set terms and attract other investors. It makes logical sense. However, in today’s dynamic fundraising environment, this approach can be restrictive and unrealistic.

Engaging multiple investors simultaneously can create competitive tension, potentially leading to better terms and faster closes.

Sometimes, smaller investors may come on board first, providing the momentum needed to attract a lead investor later.

Final Thoughts

Fundraising is an art and a science and there are many myths that can mislead even the most seasoned founders.

By understanding and navigating these misconceptions, you can approach fundraising more strategically and increase your chances of success

Till next time.

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Maria