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The Capital Raising Pitfall: How Founders Can Lose Millions or Their Business
- Published November 03, 2023 11:00PM UTC
- Publisher Wholesale Investor
- Categories Capital Raising Tips
The journey of capital raising is fraught with excitement, anticipation, and, unfortunately, pitfalls. Steve Torso, CEO & Co-Founder of Wholesale Investor, addresses one of the most common yet costly mistakes founders make during this process: negotiating with only one investor at the table.
The Allure of the Single Investor
It’s a scenario many founders have encountered: an email or call from an investment group expressing interest in your business. The excitement is palpable, and visions of successful capital raising dance in your head. However, this initial interest can lead to a significant oversight.
The Single Investor Trap
When only one investor shows interest, they hold all the cards. They dictate the terms, the timeline, and the entire negotiation process. This lack of competition can lead to unfavorable terms, prolonged negotiations, and even a potential loss of the deal. The power dynamic is skewed, and the founder is left at a disadvantage.
The Power of Optionality
The key to a successful capital raising process is optionality. Founders need to have multiple investors or groups showing interest, creating a competitive environment. This not only provides leverage but also ensures that the terms are favorable for the founder.
From Interest to Term Sheet
An expression of interest is just the beginning. The real commitment comes in the form of a term sheet. Before any changes are made to appease an interested investor, founders should ensure that a term sheet is in place. Without it, all discussions and negotiations are merely speculative.
Leveraging Initial Interest
When an investor expresses interest, founders should use this as a springboard to attract other potential investors. By building a pool of interested parties, founders can ensure they have multiple options and can negotiate from a position of strength.
The capital raising journey is complex, and while the allure of an interested investor can be intoxicating, founders must tread carefully. As Steve Torso emphasises, having multiple investors at the table is crucial. Falling into the single investor trap can lead to unfavorable terms, potential loss of control, and even jeopardise the entire capital raising process.