New entrepreneurs often seem to confuse viability with fundability. Certainly a non-viable business should be not fundable, but many viable businesses are also not fundable. Thus when an investor declines your funding request, you need to curb your anger and understand the real reason for this outcome.
In my experience, here are the most common issues that cause funding requests for potentially viable businesses to be rejected, in priority order:
- Inadequate business plan. Some investors say half the ideas pitched to them don’t have any plan at all, even though some have great potential. Other entrepreneurs skip just a couple of the elements outlined in my previous article, “These 10 Key Elements Make a Business Plan Fundable. ” Investors know that entrepreneurs who start a business without a good written plan almost always fail.
- Inexperienced team. Investors bet on the team more than the business plan. Your business model may be very attractive, but if you are new to this, you may not be fundable. If you can find a partner who has deep domain knowledge and a track record of building businesses, I can assure you that your luck will improve.
- Business domain is high risk or not squeaky clean. Certain business sectors have historically high failure rates and are routinely avoided by investors. These include food service, retail, consulting, work at home and telemarketing. Also, don’t expect investor enthusiasm for your gambling site, porn site, gaming site or debt collection business.
- Opportunity is not large or growing. Investors are looking for a large and growing market to offset the huge risk of funding a startup. Rules of thumb include an opportunity projection that exceeds a billion dollars, with at least double-digit growth. Smaller numbers may easily make a viable business but won’t attract investors.
- No sustainable competitive advantage. The market may be large and growing, but you need some “secret sauce” or intellectual property to keep the big guys from jumping in once they get the picture. Sleeping giants do wake up and investors hate to see their money used to build a market for Microsoft, IBM or Procter & Gamble.
- Financial projections are too conservative or too optimistic. Investors won’t fund people who won’t push the limits or, inversely, won’t recognize business realities. More rules of thumb: your five-year revenue projections better reach at least $20M but should not exceed Google’s actual revenues of $3B in the fifth year.
Don’t expect a straight answer on the reason for your rejection from most angels or venture capital people. They will probably tell you it all looks good but come back later, after you have finished the product, signed up a few customers or reached some other future milestone. This is called “not burning any bridges,” in case you start to show traction and they want back in the deal.
Thus you need an experienced advisor who can do his own analysis of your plan and follow up informally with all investors to give you the real reason for your rejection so you can fix it. I find it completely disheartening to see founders banging their heads against the same wall over and over again with every investor without even realizing what they’re doing wrong.
There were at least a half million startups last year and only a few thousand received investor funding. In fact, most of the others avoided all these rejections simply by using their own money (bootstrapping) or using the old standby funding source of friends, family and fools.
Even if you don’t intend to run the gauntlet of external investors, it will be worth your while to navigate your startup into a category that is both viable and fundable. Isn’t your personal risk just as important as investor risk?