The 5 Reasons Investors Pass on Startups
Is it that simple? Let’s try…
I’ve explored before HOW startups fail and article after article after article ponders why they fail. I hope we can agree on a simple fact that IF a startup is going to fail, investors would rather not be involved. Yes?
So might it be as simple? Investors consider countless data points, personal feelings, and public opinions when considering an investment, might we be able to distinguish, for you, a list as concise a FIVE?
Number 1: Nothing Defensible
Please, please please, read this: The Pitch Deck Slide That Can Make you Look Like a Moron.
You have competitors. Your competitors are not only startups. The more success you find, the more competitors you will have. And by the way, there is this notion in entrepreneur of “ second mover advantage.”
“Being a first mover is often attractive to entrepreneurs and investors because of the upside potential and ability to capture and sustain market share.” Mike Fishbein with Inc, “However, being the first to market with a wildly innovative idea is also risky. You don’t know a) if customers will view your product as valuable, b) if it’s something that customers can/will buy, c) how to acquire customers, and potentially d) if it’s even a problem worth solving in the first place.”
You need a moat.
The moat might be a patent; but likely not, you can’t afford to defend the moat of a patent.
What of your team, your marketing strategy, or your partners, establishes your moat?
Number 2: Small Opportunity
This issue is understandably where many business owners and founders get frustrated, “why can’t I find investors for my business!?”
Because you’re thinking small.
It matters. It might not be fair but it matters.
In Venture Capital, investors are seeking a 20X return on their investment.
Do the math. If we’re to put $1,000,000 into your company, we want to get $20,000,000 back.
Now, you might be thinking, that’s unreasonable! What if we’re profitable! “Venture Capitalists only care about really big companies, that’s selfish!”
Nope, here’s the thing… Venture Capital funds STARTUPS. Overwhelmingly most startups fail. And Venture Capital is in the business of managing and raising money for such things.
Appreciate that. Venture Capital is a business. If it don’t work, it don’t work for you.
When most of the investments are just lost, investors need to see that every investment is at least capable of delivering that kind of return. Why? It offsets the losses. It’s not selfish, it’s not evil capitalism at work… banks are guaranteed a return… investors in Wall Street have a pretty safe bet… MOST of what Venture Capital funds is completely lost — ergo… go big or go to the bank.
Number 3: Not the Right Team
Are you VERY aware of your shortcomings?
Reminder, we’re exploring how not to fail.
One sure way to fail? You’re a sole founder or duo and there is a glaring hole in your ability to make this work.
Why Do Most Startups Fail? Because Founders Get Stuck Making This 1 Shameful Mistake. Let me cut to the heart of what Nicolas Cole summarized there: Startups fail because their founders often lack a sense of self awareness.
- Most startup founders get stuck on their original idea and refuse to pivot.
- Startups fail because founders get stuck in their egos.
- Founders fail because they want to believe they have it all figured out, even when they don’t.
- Founders fail because they want to be seen as the smartest person in the room-and not seen as the student.
- Founders fail because they aren’t a team committed till death do they part.
Number 4: The Investor Isn’t Relevant
Here’s a short list of some of the inquiries I’ve received in the last week:
- A locally owned food trailer raising money to open a restaurant
- A documentary film seeking funding
- A medtech solution related to heart disease
I know nearly zero about those respective sectors. Granted, MediaTech Ventures knows a lot of potential film partners and sure, I know a lot of health industry VCs, but generally speaking I know nothing about such things and there is nothing about my profile, my work, that would suggest otherwise.
The VCs you want are focused on and experienced in the work you do.
Besides fit, they might be at the end of their fund, again raising their own capital and unable to invest. You might be too early stage, or too late stage, for their fund. They might be invested in something they consider competitive.
Investors aren’t banks handing out money because you can return it. Do your homework and find a partner.
Number 5: Lacking Traction
Customers. Right?
Bullshit.
Sorry for that. I practically NEVER swear, particularly online and in written word; but I’m getting fed up with founders being advised that traction means having customers.
Why are so many ventures struggling to raise capital despite having customers? Because having customers only proves that you can sell something of value to someone. Good for you, you’d not be in business if you couldn’t do that.
Do you have a team? Advisors? Do you have an audience? Is that audience growing? Does the media, even local media, like covering you or your work? Did you get accepted into a great incubator? Did you win some awards? Perhaps you have corporate partners or Letters of Intent (LOIs) that affirm others want what you’re doing?
Traction is never one thing and any evidence of traction is only as valuable as how well it overcomes investor concerns and objections.
Typically, what’s needed isn’t MORE but rather something else. Next time an investor advises that you need more traction, don’t ask them what more of, ask them why.
5 reasons investors pass on startups. Maybe it is that simple.
Originally published at https://seobrien.com on June 10, 2019.
