Funding a startup is seen by many investors as similar to gambling because the chances of success are always dwindling. While every founder or 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 Facebook, Airbnb or Uber, but at some point, you’ll need funding from an investor. For many entrepreneurs, getting investors to fund their startups is one of the greatest challenges they have to face. This does not have to be the case if you get yourself ready. 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 reasons why funding your startup can become a difficult feat to achieve. You may also be wondering why your great idea is not getting funded. It is not just enough to have a great idea.
If any of the reasons below reflects the state of your startup, it does not mean you should give up. It means you need to go back to the whiteboard and brainstorm the feedback you have gathered in order to apply the required corrections.
With that being said, below are 7 reasons why your startup is not funded (from the investors perspective). These should make you realize whether some changes need to be applied.
Lack of talent or cofounders
Execution is an important stage in any startup and this cannot be achieved without a great team. As a startup, you have different goals and milestones which can only be achieved with a sound team working towards that. Your success as a startup largely depends on the team you’ve got, the quality of people in your business will determine how fast you’ll hit those goals and milestones.
An investor pays close attention to the team you have in place to help execute your idea. 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. Learn how to find the best talent for your startup.
Investors believe in strong teams more than they believe in ideas. You have probably noticed that they tend to always ask you about your team when you pitch. If your team is not strong enough, it might be one of the main reasons why you don’t receive funding for your company. It is important that you spend enough time building a strong team as much as it is important that you spend enough time building a strong product.
Lack of expertise or knowledge on your market
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. Entrepreneurs and startups with serious funding 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.
Without a doubt, you are never going to launch a product and become successful from day one. You will need to constantly listen to the market and make whatever iterations are required to get things in order. If you don‘t know your customers or your market it will be very difficult to understand what components you are lacking to make something great. If you lack this, how then can you convince an investor to back your great idea?
No traction, no funding
Traction can be served in different flavours. In my opinion, traction comes down to growing month over month by at least 10% on one of your key metrics. Traction can be customer sales, app downloads, traffic to your website, press coverage, or something else. The more traction you have, the more likely you will be funded at an attractive valuation. If you are not finding this type of growth then something is missing. Investors want to see progress and if that is not the case it will be hard to convince outside investors to participate in your round.
Investors with money want to see results before funding your startup. Even if you pass the test as an entrepreneur, and you have a solid team, 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 to fund without it.
You are operating in a very small or crowded market
Even if you have an amazing team having a very tiny market will be a huge concern for investors. At some point, investors would like to see returns and having a small market would also limit the potential of returns that they may receive down the line on their investment.
On the other hand, operating in a very crowded market is also limiting. Unless you are one of the thought leaders recognized as leading the way in your industry it will be certainly difficult to attract dollars for your business. Investors are meeting with you and all of your competitors and unless you have something that makes you unique and stands out your chances of securing funding will be slim to none.
Your financial projections are unrealistic and uninteresting
I completely understand that financial projections, when we are talking about early-stage companies, are a shot in the dark. No one knows where you will be in 5 years from now. However, realistic projections will help investors understand your story and also get that you know what you are doing. Getting your projections right will help with increasing your trust with prospective investors.
If you show me projections for the company to bring in $5 million in revenue in five years, like nearly every other institutional investor, I will have little interest. I want to invest in a company that can grow significantly and become an exciting business. Conversely, if you show me projections where you are at $500 million in three years, I will think you are unrealistic, especially if you are at zero in revenues today.
Avoid assumptions in your projections that will be difficult to justify. Additionally, if your startup will require tremendous amounts of funding before it can be successful, that will turn off many investors.
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 funding 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.
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 food delivery service? Do your research and seek out investors specialised in your area. They will be more receptive to your idea and will know other investors who might be too.
Remember, one of the most important, initial milestones of a successful startup is that it’s able to prove its viability in the market. Stay focused on this objective. As you seek to fund, keep in mind that your investors should be your partners – giving you the advice, input, and funding to help your startup grow and sustain.