During my career in consumer private equity (TSG Consumer Partners and Encore Consumer Capital) and my time as the CEO of CircleUp, I've met with thousands of companies looking to raise capital. Most of the entrepreneurs whom I've had the privilege of meeting have been fantastic—passionate about their business and ready to do whatever it takes to be successful.
However, even the most successful entrepreneurs make mistakes when raising capital. Whether it's setting their valuation too high, creating unattainable revenue forecasts or not understanding their competitive set, mistakes like these can derail a fundraise for an otherwise worthy candidate.
That aside, the most common mistake entrepreneurs make when raising money is not raising the right amount.
Asking for too little or too much
What do I mean? If you've put a sharp pencil to your marketing and retail sales plans, and your projections show a $2 million cash hole at the end of next year, don't raise $1 million! The fundraising process is incredibly time-consuming for a small company with only a handful of employees. Asking investors for too little money is a surefire way to lose their confidence because it shows you don't understand your business.
While asking for too little money is a sin, so is asking for too much. If you have $1 million in revenue and are sold in 100 stores in the Northeast, asking for $5 million for a national advertising campaign will get you turned down all day long (I've seen that exact example before). National advertising without national distribution is a waste of money—companies at that size need to focus on grassroots marketing, working capital, adding employees and funding retail sales.
Explain how you'll use the money
There is no perfect rule for how much you should raise because each company is in a unique situation, but be thoughtful about the uses. Some angels would say the max a young consumer brand should raise is roughly equal to its revenue. I am not a formulaic investor, but you should be able to explain why your $1 million food brand needs $5 million when all others have gotten by with $500 thousand to $1.5 million.
When you should raise money is when you've achieved some retail sales, understand your gross margin picture, have nailed your product and know how much money you need to achieve a realistic growth plan that will provide investors a strong ROI.
Until then, you are best served "bootstrapping" your company because a fundraise done too early is doomed to fail and a fundraise done too late means you've missed opportunities.