Many startups are nipped in the bud when they can’t get investors. It actually proves to be more difficult than the actual beginning of a startup. But what makes it so tough? Why do startups find it hard to find someone who would invest in them?
Even after pitching to dozens of investors, sometimes startups come up empty. And here might be some of the reasons why.
You are pitching to the wrong investors
Investors typically won’t fund a startup they can’t identify with. For the same reason, founders frequently are unable to even schedule meetings with investors.
Both venture capitalist companies and angel investors have certain areas of interest in which they specialize. Make sure you’re approaching the correct investor who will be intrigued by the market niche in which you operate.
The right investor would be someone who has invested in a similar startup before. Belong to the same sectors or have experience in it. They have incurred profit from similar investments. If investors find you in their comfort zone, then it is easier for them to take the leap.
You’re way too early
Typically, there are six stages of a startup:
Now, for every stage, there are different kinds of investors required. However, what we are talking about today are the big investors or the major investors for your company. So, if you approach them in the early stages, that would be before traction, then chances are you won’t have much luck with it.
The numbers are not as needed
Sometimes the investors reject a contract because their expectations are not in line with the real business numbers.
This might occur when companies choose the wrong investor to pitch to. Let’s say your startup is valued at $1 million. Now, this might seem quite significant. But it might be too tiny for an investment for a venture capital fund with $1 billion.
Another explanation would be that they compare how long you’ve been around to the amount of attention you’ve gotten. If your business, which is just three years old and has only seen 30k transactions in that time, is asking for $1M. Because your numbers don’t support your valuation, you can be rejected.
Cash flow is a concern
Not every startup experiences a healthy cash flow at first. Investors do, however, look for appropriate management, organization, planning, and a road map to turn the negative cash flow into a positive one.
Now, how is it any of the investors’ concerns? Because inadequate cash management is cited as a cause of failure in 82% of failing enterprises.
You might run a business with $10M in revenue, but your business plan might prevent you from becoming cash flow positive until you hit $200M in sales. This will cost an investor a lot of money, faith, and risk, which they might not be willing to take.
So, these were just some of the cases of why investors may not be interested. But there are a few more reasons that we will look at next time. What could they be?