10 Reasons Why Investors Won't Invest in Your Startup
Startup financing is seen by many investors as similar to gambling because the chances of success are always dwindling. While every entrepreneur is sure they will succeed, it's the job of the investor to look beyond that all-consuming self-belief and see whether they're truly willing to gamble on you and your startup.
Your startup may well be the next Uber, but at some point you'll need funding from an investor. For many entrepreneurs that's when reality kicks in - hard. To prevent this, you need to know what will make a prospective investor splash the cash, or run in the opposite direction. This article outlines some of the issues that may discourage an investor from investing in your startup.
It doesn't matter whether you look to a bank, angel investor, venture capitalist or crowdfunding platform. Start taking steps to avoid these 10 pitfalls now, and don't get caught out by when the time comes for funding.
1) Your leadership skills are lacking
Look in the mirror, because every investor starts with you. Trust me — you are more important than your idea. Every venture capitalist or angel investor (or bank) I know takes a hard look at the entrepreneur first. If your character, integrity or leadership is questionable you won’t get funding.
Entrepreneurs often struggle to find the balance between ego and honesty. In today's world, overselling is the norm, but make sure you complement your exaggeration with the truth. Don't be afraid to show investors that you're aware of your personal weaknesses and those of your startup. They will appreciate the honesty and, you never know, they might be able to help.
So look hard and fix whatever is broken in that mirror.
2) Your team isn't up to scratch
You’re only as strong as your weakest link — right? So your top level team gets the same scrutiny. Share the mirror with them and seriously address any weaknesses. Yes — it’s a hard conversation to have. But do it. We’ve seen plenty of smart entrepreneurs fail to spot issues with their team because they're too trusting, too polite, or too focused on themselves. It's your task as a founder to make sure your team is geared for success. Nobody said this would be easy.
3) No traction with customers
Investors with money want to see results. Even if you pass the test as an entrepreneur, and you have a solid team to boot, they still want to see that you can engage customers with your ideas. Because, let's be honest, some ideas just aren't worth pursuing regardless of how talented the team behind it is. Do you have proof that your potential customers care about your solution? This is your product/market fit, and you shouldn't seek funding without it.
4) Unproven business model
Of course, it’s generally not enough to just have proof that the market cares about your idea, but you must also show that they are willing to pay you for it. There was a time in the late 90’s when entrepreneurs could raise millions of dollars with just a domain name and customer ‘eyeballs’ but no idea of how to actually make any money. But that was the dot-com bubble, and this is now.
Yes, in today's startup-obsessed investment climate you can still find examples of major investments being made without a workable business model in place. But in general, you must deliver some kind of ‘business model proof’. How do you plan to make money and do you have proof of that on a small scale? If you can’t answer the question, you won’t raise anything.
5) You're approaching investors in the wrong way
Never cold call an investor. It's as simple as that.
Venture capital firms and angel investors receive hundreds of unsolicited requests for funding from all over the world on a regular basis. Trust us, these business plans remain unopened and will find their way into the trash. Don’t let yours be one of them.
Serial entrepreneur and Silicon Valley investor Paul Jones put it this way when asked about one of the key things not to do when seeking funding: “Well, one of the obvious ones is do not cold call investors. You should try to identify investors carefully and not just send around a plan to every investor in the book or everyone you can find from some list of venture capital firms. Instead you should seek to get referred by another investor or entrepreneur. This is an obvious one but we still see entrepreneurs who don't listen.”
6) You're pitching to the wrong investors
Just like you, professional investors (and private crowdfunding investors) have areas of core competency. If an investor has a deep understanding of enterprise software applications and their associated business models, what do you think the chances are of them investing in your pizza delivery service? They might love pizza, but that's beside the point. Do your research and seek out investors specialised in your area. They will be far more receptive to your idea, and will know other investors who might be too.
7) You're not coachable
Sounds similar to my first point, but in my opinion this is a hugely important factor for investors that is consistently underrated by entrepreneurs. I have seen investors walk away from potential investments because of it.
Entrepreneurs are expected to be strong, bordering on stubborn. It's good to be passionate about your beliefs and persistent in achieving your goals. But if you’re so hard-headed to the point of being unable to listen to input from an experience and knowledgable investor then you won’t get funded.
Be strong, but humble. Show ‘deep domain expertise’, but don’t come off as a ‘know-it-all’. I think you know the difference.
8) You lack deep domain expertise
Speaking of deep domain expertise, you'd better have it. Entrepreneurs who think they will raise money for their idea in an area or industry (or with a customer) they know virtually nothing about are in for a brutal reality check. Those who raise serious money know what they’re talking about. They’re deeply embedded in their niche or area of expertise. They know the industry. They know the players. Most importantly, they know where the market is heading and they know how to get ahead. If you feel as if you lack this knowledge, or wouldn't be able to reproduce it when asked by an investor, I would consider switching industries or devoting more time to market research.
9) Failure to understand the concept of 'lean'
Not sure what is meant by a lean startup business model? Imagine this scenario. An entrepreneur walks up to an investor and asks for a million dollars in order to "raise awareness" about their business through some form of marketing campaign. This entrepreneur has shown no understanding of how to operate a lean startup.
Investors want their money back. That’s why they invest - to earn money. Every entrepreneur should at least understand the concept of running a lean startup - using funds wisely and in a targeted manner to ensure maximum efficiency - even if they don't actually do it. Investors want to know that they're not investing in a bottomless pit of money. They want to imagine their money being used to maximum effect, and ultimately that means generating revenue.
10) An inability to stop, and think
I saved the most frustrating pitfall for last. There are entrepreneurs out there who have passed from confidence into arrogance and are blind to all of the issues above, believing none of it applies to them. Good news! The fact that you've read this far suggests you're not one of them.
Self-doubt can be healthy if you use it for self-improvement. Always ask yourself "why?" everyday. Why am I doing this? Why am I doing it this way? Take a few minutes out of your workflow on a regular basis to assess your priorities, where you're going and how you're getting there. Does it all still make sense?
I have personally met with entrepreneurs who, suffering from one or more of the issues above, seemed to be going nowhere with their capital raise. But then, presumably after some deep soul-searching, they altered their team or switched their business plan and eventually got the investment they needed. Investors want to see that you're flexible, willing to adapt, and ready to give up on a lost cause.
Have you ticked all these boxes and are ready for startup financing? Get a free personal financing scan here.