This is probably the most discouraging thing in the startup ecosystem. You’ve got a beautiful slide-deck, passion for your work, have talked with VC’s, but you still can’t seem to get anyone to commit.
After you’ve got your potential investor’s attention, there are still a few extra roadblocks that I’ve seen over the years that can be the culprits.
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Let’s dive in.
1. Your financing plan doesn’t make sense
Investors don’t invest arbitrary amounts in startups, we invest in plans.
Investors want to ensure that you have enough money to make it to your next round while executing your business plan. You’ve got to show how exactly that is going to happen and how much it’s going to cost. If you pitch investors for $1M and they interpret your plan as needing $5M to adequately grow, you may have an issue getting them onboard.
If you need $5M to make it to your next round of financing and you’re looking for one investor to fill that entire amount, it probably won’t happen. Investors like to share the needs of a round and work with each other. They discuss the investment and each participates in the round to reduce the overall risk.
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Takeaways: Have your financing needs defined and build a team of investors from that.
2. You haven’t looked for cheaper capital
Venture capital is expensive. It’s the most expensive money you can get because you’re buying it with shares of your company. Venture Capitalists should be the final partners you consider when funding your business, and they know it. They also want to know that you are going to be efficient with their money; if you haven’t tried or gotten resources from somewhere else, why should they give you theirs?
There are lots of non-dilutive funding sources out there: government programs, economic development initiatives, and select accelerators. You may even consider debt options (not payday loans or credit cards). There are lots of low-interest programs out there that are familiar with seed-stage risk.
Takeaways: Research other types of funding and incorporate those into your financing plan.
3. They don’t really know you
Venture investing is a long process. You are entering a relationship that can last up to a decade on average. For this reason, investors want to know that you’re someone who they can trust to deliver. This is the reason that so many investors are reluctant to invest in entrepreneurs they haven’t worked with before. So find a way to get to know them! An example of creating familiarization would be bringing on someone as an advisor who has prior experience with this VC.
Takeaways: Network and become associated with the fund through other ways rather than just asking them for money.
4. They haven’t fallen in love with the product
I’ve seen this happen multiple times, an entrepreneur has an interesting product but the investors just haven’t fallen in love with it. This can be tough to overcome but not impossible. It’s important that the investor can envision the product-market-fit.
Sometimes this comes down to the investor not fully understanding what your product does. I once heard a veteran VC say that before he invests in any company, he gets them to pitch to his 8-year-old grandson. If his grandson doesn’t understand what they do then he doesn’t invest. Simplicity and clarity are key.
Investors usually fall in love with a product when they see a clear path to revenue and the potential for serious adoption. Your job as an entrepreneur is to make that vision as clear as possible.
Takeaways: The first customers you have to sell to are your investors. If you suspect that the investors you’re pitching don’t understand the product fit, create an “Ah-ha!” moment for them. You can do this by clarifying the path to revenue and market adoption.
Thomas Bird is a venture capitalist at a Canadian seed-stage investment fund.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions.
He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance.
He is also an award-winning writer.