You’ve gotta kiss a lot of frogs in life, and finding an investor to lead your funding round is no different. You will get rejected. Often.
Just like when you’re selling your product, fundraising requires suspension of disbelief on the part of the investor who is guaranteed to be skeptical of your pitch. In competitive markets, angel investors can get pitched hundreds of times a month, so it can take a lot to move the needle and get them interested.
Here are a few reasons you may not be inspiring them to get out their checkbooks:
Your idea is crap
Every idea is earth shattering in a vacuum. Only when exposed to external influences and compared to what’s going on in the rest of the market does the value of the idea become apparent.
Rare as truly novel business or product concepts are, when they do come along it’s nearly impossible to ignore their potential. Many investors long for the chance to get involved in a game-changer and are eager to capture the potential upside at a premium.
Most likely? Your idea is unoriginal and has low (or nil) intrinsic value. Does the world really need another location-based bar-discount mobile app?
Stop putting stock in the value of the “idea” and focus on identifying and aligning resources to execute on the idea.
You’re trying to boil the ocean
Stop trying to be everything to everyone. If your idea isn’t achievable with the resources available to you, you’re just spouting hot air and wasting the investor’s time.
It’s easy to get distracted by platform companies like Amazon, Salesforce, Google, Intuit, etc. who seem to have a product for everything. This has led to innumerable entrepreneurs thinking that they should pitch themselves as a company in the same vein.
In the past year I’ve met four different companies who want to be platforms for healthcare providers and patients to make appointments, file insurance claims, pay bills, and manage medical records. That’s great, and I can see the market need, but what piece are you going to do first? Unless you’re expecting to raise $2-3m up front, I don’t see how you can expect to execute a vision that broad. Start with the feature that represents the most market pain and grow from there.
Pitch what’s achievable and you’ll be taken more seriously. I promise.
You don’t have a team that can execute
So often I see “business people” pitching investors with nary more than a back of the envelope sketch of how the product might work. They don’t have any code written, and they don’t even have the team to write it. If you expect someone to write you a check without having the product built, at least showcase a team that can get it done.
Products don’t sell themselves (believe me, I’ve made that mistake). You will need a team member who is versed in sales. Even if your product is a free B2C app, you are going to need to sell someone someday.
Planning to run operations yourself? Good luck with that. Hope you know how to withhold and pay payroll taxes for all the cities your employees live in. Hope you’ve got experience in multi-nexus sales tax remittance. Ever set up a merchant account and done bookkeeping for thousands of transactions a month before? This is just the easy stuff; wait till you’ve got a team large enough to need an HR department.
Not sure who your lineup might be missing? When you’re chatting with an investor post-pitch, ask them “Who could we add to round out our team’s experience?” They’ll be happy to give you some thoughts and maybe even a few names.
You dismiss major competition
If you’re building a “marketplace for local services”, I’ve got news for you. It’s been done. Yes, you might be able to find a niche and carve out some significant revenue, but dismissing Yelp and Angie’s List (both publicly traded), as “non-factors” will not earn you the respect-for-bravado that you’re looking for. The right way to address direct competition is to focus on the specific reasons that your product is a better fit for the market, how you intend to compete against a significantly larger resource pool, and what you’ll do if/when you’re not able to get a foothold going toe-to-toe.
Also, maybe highlight historical acquisitions of start-up competitors and what the economics and terms looked like if a strategic exit is a potential scenario. No, you’re not planning to die on the vine and soft-land with your competition, but it happens more often than you’d expect. Be prepared.
You missed the boat on a fad
There is always a “hot” concept in the startup world. Whether it’s mobile calendar apps, photo sharing networks, stop-motion video apps, find-your-friend-at-a-bar apps, or whatever floats the market’s boat, these fads are quick to grow and even quicker to fade. When Instagram sold to Facebook, the market was inundated with new photo sharing apps and networks. People were pitching their unwritten projects for million dollar investments and talking about their “projected billion dollar exits” as if it was now commonplace to sell a revenue-less fledgling photo app for ten figures.
Here’s your rule of thumb. If you’ve noticed that there have been a lot of investments in the XYZ space, it’s too late for you to start a company in that space and take advantage of the hype. Chances are, by the time you notice it, the investors (and the tech press) are already tired of it.
You don’t have traction
Traction is unquantifiable. No specific number of users or monthly recurring revenue figure is going to magically make you investable, but growth is usually more important than anything else.
Having numbers to show is the first step. Making sure that your metrics (you have metrics, right?) are strategic and targeted toward your company’s goals is the next step. If you’re not currently focused on revenue and are in a land-grab competitive situation, then your metrics need to be concentrated on gaining new activations. Your traction is how many people have signed up for or used your product, how quickly that monthly (or weekly, or even daily) figure has increased, and how you project that as potential revenue down the road.
Some of the best pitches I’ve seen were one slide with a chart of number of activations per day shooting up and to the right. There’s just something about having traction that adds a magical quality to your pitch.
What can you showcase to potential investors? To me, the only valid answer is growth, but different investors like different things in different companies. A loosely prioritized list:
- Growth: How quickly are you adding users? What’s your monthly increase in revenue? It doesn’t really matter what it is, so much as the fact that it’s growing. Show a line chart with the classic hockeystick pointing up and to the right. Bonus points if the rate at which it’s growing is increasing as well.
- Profit: What’s your return on every dollar you spend? What’s your cost of acquisition compared to lifetime customer value? How many months does it take to recoup the acquisition cost? Bonus points if your return is getting higher or if you can lower acquisition cost through scale.
- Engagement: Whether you’re charging for your product or not, how much time and energy customers are putting into it is a great indicator of viability. What percentage of the feature-set is being used? How long on average are people using the product for each day? How does engagement relate to retention?
- Revenue: Bringing in cash is always great, but it’s almost worthless if you don’t know how much it’s costing you to bring it in. Just talking about revenue is a red flag for many investors because a $10m annual run rate sounds great until you have to disclose that it cost $20m to get it.
- Eyeballs: When you’re touting how many thousands of hits your site gets every day you’re really talking about potential revenue. No, you may not have figured out how to monetize all those eyeballs yet, but you will eventually and that’s what an investor is interested in. Even if you never monetize them, your eventual acquirer will want to, so you should present an idea of how it will be done and how much potential they hold.
You have the wrong attitude
Let’s be clear that no one owes you anything. They don’t owe you a meeting. They don’t owe you the benefit of the doubt. They certainly don’t owe you an investment.
A certain level of bravado is to be expected from entrepreneurs like us. We see the value in what we’re doing and use our confidence to try to convince others of it. We ignore the problems with our business and forge ahead seemingly unaware of the dangers that lie ahead. It’s when that personality trait gets out of control that we get ourselves in trouble.
You know your business better than anyone else, but be accepting of feedback and try to answer the tough questions that invariably get asked. Don’t get upset or condescend when someone doesn’t understand your business model. Don’t roll your eyes when the VC incessantly name-drops or mentions his private jet. Don’t freeze up when the projector won’t work with your laptop.
Would you invest in someone who was kind of a jerk? Probably not.
Your goals and motivations don’t align
Even if you’ve done everything right, there are plenty of reasons you wouldn’t get a call back. Most likely, your business didn’t fit the “themes” of the current fund. “Themes” is a loose term for the types, sizes, expected timeframes, and expected returns on any deal that the fund makes. Some funds might focus on network effect in B2C, while others focus on recurring revenue B2B, while others focus on freemium mobile apps with microtransaction monetization. Some funds only invest in pre-IPO businesses with $XXXm in revenue (but you only pitched them because your uncle knows a guy there right?).
Outside of fund themes fit, there are a ton of alignments that need to be evident before an investor will be interested. Make your intentions for the business known. Plan to IPO in ten years and retire in 30 years as CEO? Say so. Want to sell to Yahoo! within 18 months? Bring it up. Want to focus on product and design and bring in someone to run operations? That would be good to know.
If you’re pitching an institutional investment vehicle, whether a VC fund or a state economic development group, you need to understand the internal workings of the organization before showing up. What are the objectives? Who holds the reins? Are you pitching a VC who is approaching the end of a fund? What timeframe for exit is expected? The economics and politics behind venture funds can be exquisite in complexity, so do a little research and show up prepared.
Regardless, you need to be persistent
I can’t stress enough that to find the right investor you need to be determined. It takes literally hundreds of meetings and pitches to make a funding round happen, so be prepared for the long haul and don’t let the onslaught of “No”s discourage you. Learn from each failed pitch and adjust your messaging for the next one.
Remember that investor cash is just a means to an end. Raising money does not equal success; it simply acts as a tool to achieve it.