It is back to school season for startups as well as children. As such, it is a crucial time for founders to re-engage investors and re-ignite funding conversations. However this is a journey often fraught with misunderstandings that can derail a founder’s efforts. 

From underestimating the time required to overlooking the importance of financial preparation, many entrepreneurs enter the early fundraising process with a skewed perspective. This can waste valuable time and effort that founders can ill afford. We’ve gathered insights from a number of experienced angel investors and experts to debunk the most common misconceptions and help founders better prepare for success.

1) Not fully appreciating the preparation required for due diligence 

It is a common misconception that simply having a brilliant idea is enough to secure funding. Investors, however, are looking for much more. They need to see a robust business model, clear unit economics, and a justifiable valuation. In today’s climate these fundamentals are not nice to haves, but essential. 

Kelly Clifford, an experienced CFO turned angel investor, highlights this very point. In his view, “Many founders underestimate the level of preparation required. Due diligence isn’t just a box-ticking exercise; investors want to see a well-thought-out business model, clear unit economics, and a compelling reason for their valuation.” 

He adds that founders often mistakenly believe that raising money is a sign of success in itself, when in fact, it is merely a means to an end. The true focus should always be on building a strong business. To counter this, Clifford advises founders to have all their key company documents in order, including a solid business plan, a data room with financial statements, legal documents, and a compelling pitch deck.

2) Letting personal commitment to an idea cloud judgement

Another significant hurdle founders face is failing to recognise how their personal commitment to an idea can cloud their judgment. They may be so deeply invested in their concept that they can’t understand why an outsider isn’t equally excited. This can lead to founders becoming defensive when investors ask probing questions.

According to Robin Leigh, a highly experienced private angel investor, this is a major issue. “Being so close to their idea, and so committed to it, that they find it hard to understand why an outsider isn’t immediately excited by it as well – and sometimes even offended when asked questions testing the robustness of the idea or to understand what makes it so compelling.”

Leigh stresses that while passion is crucial, it is not sufficient. Investors need to see financial projections based on reasonable assumptions to prove the business’s viability. The issue of unrealistic valuations is one of the leading issues for investors across our network.

This is a point investor and author of Angel Think Phil McSweeney agrees with. “Despite a founder thinking they have something novel, it’s quite common for investors to say they’ve already seen something very similar.” McSweeney advises founders to thoroughly validate their idea and be prepared financially to sustain themselves for a considerable period before they can pay themselves a wage.

3) Underestimating the time and complexity of the fundraising process

Founders often believe that because they have a great product or service, securing investment will be quick and easy. This can lead to dangerous situations where the company runs out of cash before the round is closed.

Global investor and syndicate leader Colin Boey warns against this. “The most common misconception is underestimating how long it takes to close a round, especially in tough fundraising environments,” he notes. 

Boey emphasises that while founders would rather focus on building their product and acquiring customers, their top priority must be to ensure the company doesn’t run out of cash. His advice is to start investor discussions early and consider hiring an investor relations associate or a fractional corporate development officer to manage the process effectively.

4) Founders can ignore their initial, early-stage investors once a large venture capital firm shows interest

Early investors, particularly angel investors, took a significant risk, and it is crucial for founders to maintain respect and a strong relationship with them throughout the company’s growth.

Joanna Jensen, founder of Childs Farm and former chair of the Enterprise Investment Scheme Association (EISA), has seen this mistake firsthand. “Your initial start up investors have taken a huge risk in backing you in the first instance. So be respectful towards them as your business grows and you look to obtain further investment,” she advises. 

Jensen points out that founders often forget about existing shareholder pre-emption rights and can alienate their early backers. When the potential “superheroes” from a larger fund change their minds, founders can find themselves dispirited and without the crucial support of their original shareholders.

5) Starting the fundraising process too early

While building relationships with potential investors is important, approaching them before the company is ready for investment can lead to a negative perception and even get the startup blacklisted.

Hailey Eustace, founder of Commplicated and a passionate DeepTech angel investor, shares this view. “Too many founders start fundraising too early as they have been advised to build good relationships with VCs. But if you go to a VC too early, before you are ready to receive funding, you aren’t investable and you could be blacklisted as ‘not relevant’ for their fund.” She recommends that founders begin preparing for their fundraise six months before they plan to start approaching VCs. This front-end preparation can significantly speed up the fundraising process.

By understanding and addressing these common misconceptions, founders can approach the fundraising process with more realistic expectations. With thorough preparation and anticipating challenging questions thet have a greater likelihood of securing the investment they need to succeed. While children have their parents to nag them about back-to-school homework, founders must be their own taskmaster, doing the necessary prep work before their first pitch.

Are you looking for an angel investor to help fund your business? Join us at Angel Investment Network, where global investors meet the great businesses of tomorrow.