The Road to Round A: Part 2 of 3

* This blog post is based on Natan Chosnek’s presentation at the Alternative Finance Conference on March 4, 2013.

 

So, you raised seed funding. You should be much happier now, only you’re not. You have more demands to manage. You have new goals. You have staff. You have investors, and they don’t act like angels anymore.

We hate to tell you this, but it may get even harder. We are going to share with you a few of the common mistakes start-ups make on their way to Round A.

“Start thinking about second round as soon as you have the term sheet for the first round signed”, says PlanetSoho CEO, Ron Daniel, who raised $8 million series A round.

Start-ups don’t think about A round early enough, knowing that the second round is coming, and that the chance to succeed is totally dependent on the type of investors they need to approach, and their ability to set goals that will work for second round.

For some start-ups, seed funding came too easy. There are many reasons for it. A CEO that completed series A round in 2012 told us that this made him vain when meeting VCs for his second round. He got kicked in the butt – which he rightly deserved, and he had to change his attitude in order to succeed.

Vanity is just one of many mistakes you cannot afford when raising A round. Another is increasing your burn rate, and not taking into account that raising more funds will take longer than you expected.

The third common mistake we call “digging your own grave”. Many start-ups set unrealistic goals to attract their investors during first round. “Ambitious milestones are a double-edged sword”, says Yevgeny Safovich, CEO of SphereUp, raising B Round these days (Disclosure: SphereUp is a Forabilis client).

Start-ups and investors should realize that it is better to succeed in achieving realistic goals, rather then failing impressive ones. We have seen a start-up with a very impressive seed funding promising investors hundreds of paying B2B customers within a quarter, and, not surprisingly, failing.

Another topic many start-ups struggle with is whether to try and take giant leaps, or focus on baby steps. Giant leaps sound more impressive and the right way to go – but is it really?

Sometimes taking a small step towards your next milestone is more important than working towards a huge – but futuristic – goal. “You can do without the revenue, but even if a small number customers talk to your value – you still have a chance”, says Sharon Wagner, CEO of Cloudyn.

The last common mistake we will discuss, and it is a typical one for Israeli start-ups, is falling in love with features – and the more, the merrier. Developing your product should not come at the expense of visibility and marketing efforts. Dropbox is a great example for a start-up that had just enough of a Minimum Viable Product to go to market, used it to learn from its first customers, and become a huge success.

In summary, there are many pitfalls on the way to Round A. How do you beat the odds? we will share our best tips for the road in part 3 of this blog post.