I have been wanting to write this article for some time now, but something always came up every week. Finally, it’s here! This will be a series, but this post will be like the executive summary (if you wish) to the series.
This article is born out of my relatively short experience as an early stage VC investor, writing business plans and pitch deck, working with entrepreneurs, building financial models for startups, trying to build a startup myself, as well as the experience of many other investors in this space. This list is not exhaustive and can be controversial as people have different opinion about the topic.
I have highlighted 9 reasons I believe most startups are not getting funded; so, let’s get into it;
- Elite Team/Founder – If you check the investment thesis of most VCs, they agree that they back teams not necessarily the ideas (at least on their websites). Most VCs don’t fund great ideas if they are not convinced that they are backing the right team to execute the idea. I personally have passed on 2 investments because of the team. Some VCs will invest in the opportunity, fire the founding team (I mean sack the founding team), then recruit a new team to execute the idea. This approach is largely hostile; hence most VCs rather decline an investment. Some other investors will listen to the idea, then fund a trusted entrepreneur to execute the project. Now, this is brutal. The point of this is that, irrespective of how low hanging the opportunity might be, I will still require a grade A team to execute it.
- Size of the Opportunity – VCs want to know how large the investment opportunity is. They need to be comfortable that the opportunity is significant enough for them to deploy resources to capture. That’s why some investors have thresholds. They need to be sure the opportunity is worth their time, energy and resources. You also have to understand the dynamics of the size of the VC’s Asset Under Management. For a VC with $50m AUM, a $500m opportunity might be good enough, but for SoftBank’s Vision Fund, $500m is a joke.
- Lack of Critical insights into consumers and their behavior – Entrepreneurs need to know that VCs are not necessarily experts in the field. So, if an Entrepreneur pitches me as an investor, I will like to appraise the entrepreneur’s understanding of its consumers. That is why most copycat models fail. You need to know who that customer is and why he will use your product. You need to know how this customer is currently addressing this challenge, the inefficiencies in the current model, why your solution is best for him, why he will take your solution and why he will pay for it (or how you will make money off it). You need to know why previous attempts to solve this problem has failed and why yours won’t. Superior unique customer insights will at least earn you a second meeting.
- Lack of critical insights into the Market – The worst point you will get to as an entrepreneur is when it appears that your investors know more about your industry than you. It sends a wrong vibe and gets the investor to the first point – This is not the right team, irrespective of how solid the idea might be. Notice I said, “Critical Insights”. Anyone can learn about an industry from Google. However, as an entrepreneur, you must have information that is not on Google. You must have “inside gist” not newspaper report.
- Little or No Traction – Before you talk to an investor, you should have (at the minimum) a prototype of your product, designed with help of the end-user. Better still, you should have traction. 500 downloads in 1 week, 10k monthly active users, 20% paying customers etc. You should have a story to tell. And something to show! Not just ideas and your plan etc. VCs are doubters, you must convince them and demonstrate that your product will work.
- Little or No learnings from Past mistake – VCs want to know; “how did you arrive at this product, strategy and approach?”. VCs want to know what you have tried, and how it failed, what you learnt and how you restarted and how it didn’t catch on and how you added this and added that and the feedbacks you got and how you incorporated the feedbacks and how your server crashed and how you changed your marketing speak etc. VCs are interested in all of those. They need to be convinced that you know what you are doing.
- Motive of the founders for building the venture – Why are you doing this and not that? They need to be convinced that you are committed to solving this problem even if your current solution fails. They need to know that your conviction is strong enough to keep you fighting even when things are going south. They need to know that you are in here for the long haul! They need to know that you think, eat, dream, sleep, work this dream. It is what you live for. They need to see the commitment in your eyes, then they can back you.
- Tech for Tech Sake – What problem are you solving. We know that there are a lot of programmers looking to hit the jackpot, hence they will build anything just because they can. VCs will need to know that you are not just building a product just because you can, you must think about the problem you’re solving and the business you are building. It’s not just about building tech.
- Valuation – You need to have a realistic valuation. Then the question is; what is realistic? Valuation is largely skewed based on the forces of demand and supply. If VCs are competing to get on any deal, then the deal becomes a lot more competitive. Hence, to shore up your valuation, you must have an impressive business case that VCs are willing to fund.
Barring any breaking news during the week, I will continue next week by doing an in-depth analysis of these points week after week.