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?
No entry barriers
Investors do search for a proprietary idea or execution that has a unique selling proposition. They favor entry obstacles like patents, exclusive agreements, and contracts.
Investors seek out long-term advantages. If they decide to invest in a firm, they consider if it has the ability to hold a significant portion of the market or to continue to be the market leader after they leave.
They’re backing your competitors
An investor seldom funds two comparable companies in the same industry. If you are the owner of a T-shirt retail business, speak with an investor who has previously backed a business like yours. Due to the fact that they already support your rival, there is a good likelihood that they will decline.
You don’t know your KPIs
Investors seek entrepreneurs who have a solid grasp of their company’s finances and critical metrics that show how successful it is in reaching important business goals. If you don’t know your top priorities and the crucial KPIs that reflect those priorities, it may be difficult to attract investment.
Investors can reject your offer if they don’t see convincing evidence that you comprehend your KPIs and have strategies to raise them.
The addressable market is small
The Total Addressable Market, or TAM, is the maximum growth opportunity of a startup. Even though many founders try to scale their TAM down so that it is less ambiguous, many scale it down to such a level that it looks too small to invest in.
If the investors find your TAM too small to produce results, then they might turn down the offer.
You don’t have in-depth knowledge about your competitors
One of the typical questions investors have for founders is how they differ from their competitors. The answer to this question comes from in-depth market research. It comes from understanding who our competitors are and what they offer, and how what you offer is different from it.
If the investors are not confident about your competitive advantage, unique-product market fit, and value proposition, then they will not go ahead with it.
You don’t have the right business model
A business plan outlines your vision, objectives, and strategies for achieving them, all of which are articulated numerically. On the other side, a business model describes how you run and generate revenue. If the business model cannot pack a punch, then it is very difficult to trust that the business will run smoothly.
Your fundraising proposal can be rejected by the investors if any of these don’t appeal to them.
More often than none, solid research about the investors, your own startup, and the competitors and a sound understanding of how the business is going to progress will do wonders. You can also connect with us, so that you can find out how to kickstart your business!