This is why an investor won't fund your startup

Obtaining investment can sometimes be more difficult than getting started. And many startups fail because they cannot secure funding. Only 0.91% of the startups get their funding from Angel investors, and only 0.05% succeed in getting Venture capital funding. Let's look at some of the most common reasons why investors are unwilling to fund your startup.

Table of Content

01. Why do startups need funding?

02. What prevents an investor from funding your startup?

Why do startups need funding?

The money needed to launch and maintain a startup is referred to as funding. It is a monetary investment in a business for inventory, office space, sales and marketing, manufacturing, product development, and expansion. Managing a startup is no easy task and it takes many skilled individuals to get it done. Many startups decide not to seek outside funding and are instead solely supported by their founders (to prevent debts and equity dilution). However, the majority of startups do raise money, particularly as they expand and scale their businesses.

Read our guide on Startup project management before considering seeking funding. It could save you a lot of time. 

What prevents an investor from funding your startup?

Nobody wants to intentionally lose money. But funding a startup can be a smart or foolish move. The danger of gambling is just that. Consequently, as you look for funding, you need to be aware that investors might decide against funding your company for a number of reasons.

1. Your Business Is Not a Good Fit For Their Portfolio

Let me break it to you in case you didn't already know: investors typically won't invest in a startup they can't personally identify with. For the same reason, founders frequently are unable to even schedule meetings with investors. Both venture capitalist companies and angel investors have specific areas of interest in which they specialize. Make sure you're approaching the right investor who will be intrigued by the market niche in which you operate.

Send us a message at any time to see how we can help you to find out how we can help you expand your startup and find the right investors.

Choose investors who:

• have previously made a stake in a startup in a related field.
• belongs to or has some experience in a similar niche.
• have made money off of prior investments in a startup in a related field.
   

2. You arrived a little too early to make an investment.

In a typical startup's lifetime, There are 5 stages.

• Ideation

In the initial stages of a startup, the business itself is essentially just an idea. If you don't take action after this point, your idea will just sit there and never fully develop because someone else will think of it first.

• Designing an MVP (Minimum Viable Product)

In the MVP stage, you know the pain point you're addressing, but the "how" you're going to address it (technically and practically) needs to be refined.

• Finding Product-Market Fit

If your customers would be upset if you went out of business, you've reached product-market fit. It means you're solving a real problem for enough people that your company is viable and has real growth potential.

• Finding the Channel-Product Fit

If you approach major investors when your startup is still in its early stages (and has no traction), they're likely to reject you.

• Maturity

Your startup is no longer truly a startup once it has matured.

Instead, it's a full-fledged company with a tested product that fits well with its target market and distribution channel.

If you approach major investors when your startup is still in its early stages (and has no traction), they're likely to reject you.

3. Your Statistics Are Insufficient

Sometimes the investors reject a deal because their expectations are not in line with the actual business numbers. This can occur when companies choose the wrong investor to pitch to. Let's say your startup is worth $1 million. Now, this might seem very significant. But it might be too small an investment for a venture capital fund with $1 billion.

Another explanation might be that they compare how long you've been around to how much attention you've gotten. If your business is only three years old and has only seen 30k transactions in that time, is asking for $1M. Your valuation may not be supported by your numbers, which could result in rejection.

If you aren't confident in your evaluation, use these 6 Methods to Evaluate your Startup Confidently.

4. The issue with the cash flow

Not every startup experiences a healthy cash flow at first. Investors do, however, look for appropriate management, organization, planning, and a roadmap to turn the negative cash flow into a positive one. Because poor cash management is cited as a cause of failure in 82 percent of businesses.

You might run a business with $10M in revenue, but your business model might prevent you from becoming cash flow positive until you reach $200M in sales. This will cost an investor a lot of money, faith, and risk, which (s)he might not be willing to take.
 

5. They don't find the pitch to be transparent.

Investors look for founders who have a solid grasp of their company's finances and key metrics that show how successful it is in achieving critical business goals. If you don't know your top priorities and the crucial metrics that reflect those priorities, it may be difficult to attract investment. Investors might reject your offer if they don't see convincing evidence that you comprehend your KPIs and have plans to raise them.

The success of your startup may in some respects depend on the quality of your pitch deck, therefore knowing how to pitch it to investors is essential. Follow this 5-step guide to pitching your startup to investors to create the post pitch deck possible.

You should carefully manage the number of words and information on your pitch deck depending on whether you are sending it to your investor or presenting it in person.

Startups frequently struggle to depict and explain specific business models that might seem more complex in emerging technologies like blockchain.

Knowing some of the Most Common Startup Pitch Deck Errors and How to Avoid them would increase the overall quality of your pitch deck as well.

Here are some guidelines to help your pitch deck be more concise:

• Cut back on the jargon. Your investor might not understand your industry jargon unless they are from a related industry.
• Use straightforward language that laypeople can understand to make your business model appear less mysterious.
• Refer to similar existing businesses as "Uber for X" or "Amazon for X" has become a common pitch used by most founders, and for good reason.
• Instead of attempting to explain your company from scratch, it is simpler to describe it using an existing reference point.

6. You have not optimized your pitch deck for your funding round.

If you tried everything mentioned above and you're still having trouble, you might be pitching in the wrong round. It's likely that you will raise a Seed round for a new startup, which typically has a lower valuation and consequently lower expectations from investors in terms of traction metrics.

However, there are other different Seed Funding for Startups, such as Series A, B, and C, and their respective investors look for various considerations. Seed Funding for Startups

Make sure you are focusing your pitch's details on the appropriate ones. The quality of the founding team, any early traction or validation, and the viability of the solution is typically more important factors in the success of the seed round.

Series A: This round is much more metric-focused and requires that you have already attained product-market fit and occasionally profitability.

At this point, additional investment funds are primarily intended to accelerate growth, lengthen your runway, and test a few time-sensitive ideas you might have for expanding the company.

Series B: At this point, investors will presume you already have a model that has been successfully tested, is profitable and is expected to grow rapidly.

At this point, money is typically used to expand into new markets and speed up growth.

For many new founders, creating a pitch deck can be a terrifying task and You better have these 7 crucial slides in your startup pitch deck. One piece of advice is to constantly consider your presentation from the perspective of potential investors to avoid overlooking important information.

8. You overestimated the size of the market

You must accept the possibility that you won't be able to successfully capture the global recruitment market, which is estimated to be worth US$ 215.68 billion. This is one of the first indications of a naive, inexperienced, and overeager founder, and investors are well aware of it.

Mention the :

• total addressable market
• serviceable available market
• and serviceable attainable market. 

These metrics give investors a realistic picture of the market you might be able to capture.

Investors are looking for markets with appealing market sizes that have good potential but realistic customer metrics. In Airbnb's pitch deck, concentric circles that show conservative estimates of market sizes gradually scale down to show these metrics. Scalability is a significant factor for investors because it indicates greater opportunities for return on investment. However, investors' risk that you are over-projecting is also decreased by being prudent in your market sizing.

9. You forgot to acknowledge the competition.

A warning sign is showing up at the investor meeting and claiming that there is little to no competition in your chosen industry. Talking about more established competitors in their niche can make younger founders uncomfortable.

But if there is no competition, is your market or industry really worth pursuing?

Be fearless because what you are doing is nothing new. Your business idea may not be entirely original after all.

In fact, the presence of competition persuades investors that their investment is less risky because it is in a business model with a proven track record. Create a case for an underserved market in your area as a way to slant your pitch. Various industries, for instance, are largely untapped developing markets despite being highly saturated by the media. 

10. You don't have a solid business plan.
An idea can come to anyone. Execution is what counts in the end. Have you thought about where you want your company to be in a year, two years, five years, or ten years? Do you have a strategy for getting there? Can you provide evidence that your business can survive the intense market competition?

These are the first things that potential investors check for. It's not only about how committed and passionate you are. They want to know your future plans for the business, as well as evidence that you have the ability to carry them out. 

Show that you have a thorough understanding of the key performance indicators for your company, that you can measure them, and that you can alter these indicators as well as other parts of the organization to help it grow.

There you have it!

Now you are aware of what to avoid when you go and pitch your startup to a potential investor. Keep in mind that seeking funding from angel investors and venture capitalists is one of the most difficult aspects of the entrepreneurial journey but fortunately, It does not discourage driven startups from attempting to take over the world. You can always fight the odds by teaming up with the right startup experts and that's where we come in.

At CreativeHub, we go above and beyond to make sure that your startup is provided with the best technological solutions and that these solutions are implemented by exceptional designers and engineers.

Go ahead and check out our success stories and send us a message at any time to discuss how we can take your startup to the next level.