Six obstacles startups face when seeking investors and how to overcome them

Finding the first investors is a crucial step for startup companies, but it requires overcoming various obstacles during this process. Relying on the expertise of EIT Health, the largest European network of health innovations, we analyze the main obstacles that startup companies encounter during this critical phase, from breaking down misconceptions to finding the right investors instead of those offering easy profits.

Financing is a challenging endeavor for early-stage startup companies. This is especially true for central, eastern, and southern Europe. Thanks to significant changes enabled by the European Union and national institutions in recent years, there are now numerous programs addressing these issues, making it easier for startup companies to find financing. However, founders often seek investments everywhere instead of focusing on finding the right investor who fits into their long-term strategy.

There are several pitfalls that startup companies may face in their search for investors, but there are also solutions. The insights gathered are based on the expertise of Tamás Békási, a business creation manager in the EIT Health RIS region, which encompasses 13 developing countries in terms of innovation.

1. Cultural readiness

Startup companies often lack the cultural background to work with institutional investors. Many founders come from family and friend environments where flexible hierarchies prevail. However, when inexperienced and often young teams interact with seasoned business professionals, it requires a different mindset.

According to Békási,’startup companies must learn how to collaborate and understand investor expectations.’

– It is crucial to understand that investors are neither cruel wolves nor altruistic angels; they are business-oriented individuals. This challenge is particularly present in startup companies in the healthcare sector, where students and doctors often take the initiative for innovations and team formation without the necessary business knowledge to navigate the world of investments – added Békási.

2. Choosing the right investor

According to Békási, choosing the first investor is like getting married. In the best case, the partnership can last a lifetime. However, if the match is not compatible, it can result in a painful and potentially harmful breakup. Startups are already in a fragile state, and going through a divorce can further burden them, potentially leading to the company’s failure. Therefore, it is crucial to carefully select investors who align with the goals, values, and long-term vision of the startup company.

3. Breaking down misconceptions

Many startup companies mistakenly believe that they hold all the cards and that everyone should fight for them because they are special ‘snowflakes.’ On the other hand, investors also occasionally fall into the trap of believing that their money gives them absolute control.

– In reality, it is a collaborative relationship in which both sides compete for mutual benefit. Startup companies have the privilege of choosing their partners, but they also need to recognize the value that investors bring to the table – emphasizes Békási.

4. Strategic investments

Investing without a clear strategy can be costly. Some startup companies see investors as a simple way to make money. After a successful presentation, investors may contact them with an enticing offer, but this may turn out to be a one-time offer that does not align with the company’s long-term plans. According to Békási, it is crucial to carefully evaluate investment proposals and ensure that they align with strategic goals.

5. Undervaluing or overvaluing the company

Startups often face tough decisions when assessing the value of their company. They may sell a significant stake for a small investment because they desperately need money. However, they may not consider the consequences for future funding rounds, where they would have to sell even more shares. On the other hand, setting a high valuation in the first round can make it difficult to attract additional investors who are capable or willing to invest large amounts. Finding the right balance is crucial.

6. Investor reputation

The reputation of the investor can affect the future fundraising efforts of startup companies.

– If an investor has a poor reputation or is known for difficult collaboration, it can deter future investors from participating in later funding rounds, as they need to syndicate deals with each other. Although the first-round investor is often crucial for survival, it is important to consider the broader implications of their reputation – points out Békási.