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10 Reasons Why Your Startup Idea Is Terrible And Won't Get Funded
10 Reasons Why Your Startup Idea Sucks and Won’t Get Funded
By Richard Harroch | In: Getting Started, Starting a Business
As a venture capital and angel investor, I get bombarded with proposals to invest in startups. Many of them are terrible and just not fundable by angel investors or venture capital funds. Here are 10 common mistakes I have seen startups make that have resulted in their inability to raise financing.
1. The business idea is too small.
Many business ideas go after too small of an addressable market. Venture and angel investors are looking for companies that can grow to be big and result in “home run” returns. Professional investors are looking for the “next big thing,” not the “next small thing.” (Thanks to Lee Jay of Orrick, Herrington & Sutcliffe for that insightful phrasing.) Think about how the business can scale to be meaningful and make sure you present it that way.
Additional reading:
· 28 Mistakes Entrepreneurs Make When Pitching Investors
· The 10 Commandments for Obtaining Angel Funding for Your Startup
· 8 Mistakes Entrepreneurs Make When Pitching to Investors
2. Your executive summary or pitch deck is underwhelming.
You must have a very impressive pitch deck or executive summary. It can’t be more than 15 slides long if it’s a PowerPoint or a few pages long if it’s an executive summary. And you have to hit the high points of what the investors are interested in. Whatever you do, please don’t prepare a 50-page business plan, as nobody has the time or patience to review that.
Additional reading: 28 Mistakes Made By Entrepreneurs in Pitching to Investors
3. You haven’t thought through all the questions venture or angel investors will ask.
You have to be prepared for your in-person pitch, and that means anticipating all the questions you will be asked.
Additional reading:
· 50 Questions Angel Investors Will Ask Entrepreneurs
· 65 Questions Venture Capitalists Will Ask Startups
4. It’s just an idea and you haven’t had any traction with it yet.
To get investors interested, you can’t just have a good idea, as most investors believe that good ideas are a dime a dozen. You need to show progress in the business and any traction you might have already gotten. 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.
5. You don’t have the right management team.
No one expects you to have a complete management team early in the business life cycle. But you have to be able to show that you have some smart, dedicated, and hardworking founders with relevant business experience. Many professional investors believe that the quality of the management team is the most important factor in determining whether or not to invest in a startup.
6. You haven’t done a survey of the competition.
Every business idea will have some competitors, and you come across as naive if you assert to the investors that your business has “no competition.” In contrast, your analysis of your competition and its deficiencies will show me you have a good understanding of the market.
7. Your financial projections are uninteresting or unrealistic.
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, such as how you will get to a 400% growth in revenue with only a 20% growth in operating and marketing costs. I also need to know how long the money I invest in your company will last, and what progress you think you will be able to make with that investment. Additionally, if your startup will require tremendous amounts of capital before it can be successful, that will turn off many investors.
Additional reading: Angel Investing: 20 Things Entrepreneurs Should Know
8. You haven’t convinced me of the need for your product or service.
You must clearly articulate what the company’s product or service consists of and why it is unique, so expect to get the following questions:
· Why do users care about your product or service?
· What are the major product milestones?
· What are the key differentiated features of your product or service?
· What have you learned from early versions of the product or service?
· What are the two or three key features you plan to add?
· How often do you envision enhancing or updating the product or service?
9. You seem clueless about how to get customers.
You have to show me that you will have an understanding of how to get customers. You can’t just assume that if you build it, customers will come. You need to present me with a well-thought-out customer acquisition strategy, a coherent marketing strategy, and evidence that you understand customer acquisition costs and that you have a good sense of the lifetime value of customers.
Additional reading:
· Ten Tips to Build Customer Loyalty
· 7 Reasons Why You Should Use Social Media to Connect With Customers
· 11 Tips for Getting Your Customers to Make More Referrals
10. You don’t have a good visual of your product or service.
To help me understand your business, it’s helpful to see a working prototype or a professional-looking video summarizing the product or business.
Additional reading:
· 25 Frequently Asked Questions on Starting a Business
· 28 Mistakes Entrepreneurs Make When Pitching to Investors
· 99 Inspirational Quotes for Entrepreneurs
· 10 Big Legal Mistakes Made by Startups
Copyright © by Richard D. Harroch. All Rights Reserved