Guest writer Joshua Lawton-Belous is a serial entrepreneur, angel investor, and an adviser at Newchip. You can follow him on Twitter @alertingmainst and connect with him on LinkedIn.
Going after venture capitalists to invest in your company is a lot like dating. Get enough rejections and you’ll start questioning, “what’s wrong with them?”
Unfortunately, the question everyone should ask instead is, “What’s wrong with me?”
There are times when investors just do not understand what you are trying to do. These types of investors are never going to get what you are trying to do.
The dirty secret is most investors don’t care what you are trying to do. They care about making money, their portfolio returns, and how those returns are going to impact their ability to raise additional funds. Also, investors care about protecting their reputations.
“When founders pitch me, I often ask them ‘Who do you expect to pay you for your service or product?’ Then I ask, ‘How many of those people did you talk with to validate who is going to pay for your service or product?’ If they tell me less than 40 people, I tell them to go back and talk with more,” said Ian Folau, managing partner at LMI Ventures.
This caution often drives investors and venture capitalists (VCs) to say “no” or “not now,” advising you to gain more traction before asking for funding again.
VCs get pitches from entrepreneurs every day. Even at Newchip’s Global Online Accelerator, where I am an adviser, we reviewed over 600 applications in one month for our first cohort! We’re an accelerator program, so you can imagine how many pitches venture capitalist firms with millions of dollars in an investment portfolio probably receive.
If you’re serious about what your startup is doing, have built a great team, and you’ve put in the hard work to prove that there is a market for the product or service that you are building or already have, there are investors out there who are willing to bet on you. You have to do the work to find them, true. Understanding the red flags investors look for will help get you ahead of the many others pitching.
“If you don’t get the basics right and if you don’t know the basics, no investor in their right mind is going to invest in you,” said Marcos Larios, chief operating officer of Newchip Capital.
Seven Deadly Sins Founders Commit that Make it Easy for VCs to Say ‘No’
The founder does not understand what being an Accredited Investor means.
Under the federal securities laws, only accredited investors may participate in certain securities offerings. Learn what it takes to become an informed founder when talking to investors.
Sending an Accredited Investor form via email in a non-fillable PDF format.
Make it as frictionless as possible to get an investor’s money. Send your Accredited Investor form through a system like DocuSign. You can use an Accredited Investor form template like the one here.
Founder lacks a data room or has incomplete data to offer to prospective investors.
Create a folder in a Google documents drive, turn off link sharing, and specifically share it with an individual. At a minimum include leadership bios, your business, financial projections, and an executive summary.
The founders lack an investment vehicle (convertible note, SAFE, or KISS note, for example) for an investor to use.
Fundraising is akin to sales. Once you have the prospect convinced and ready to buy, if you don’t have the product ready to give them, prospects can and sometimes will walk away from the deal. Investors are no different.
Founders have not done enough market research.
Convincing investors that people are going to buy your product means tons of research and market validation. Remember you are pitching to people who have seen hundreds, probably thousands of pitches.
Sumay Parikh, a principal at Quake Capital Partners sums it up this way.
“You might think that your startup is a unicorn. But it most likely isn’t. You might think that your startup is unique. But it most likely isn’t.”
A founder’s valuations are unbelievable.
Valuations need to seem realistic to an investor. While the difference between a $3.25 million and $3.95 million valuation isn’t going to be the reason for an investor to not invest in you, if you have zero revenue, zero traction, and this is your first startup, it is doubtful that anyone will invest in you at a $15 million valuation.
Sumay Parikh, a principal at Quake Capital Partners, also cautions founders that VCs will check your numbers carefully.
“As a VC, we are constantly evaluating which valuations are being presented in the market and identifying which are the most appropriate for our fund,” Parkin said. “I am always going to have a startup that my team and I use to determine a market valuation for your startup.
“Even with your startup, I’m going to review your own metrics and see if they support your desired valuation. If you’re seriously overvaluing yourself, you might want to take all of the feedback that you receive from other pitches before continuing to pursue investors.”
You don’t have a co-founder.
The startup life is really hard and burnout is a serious concern. Being a solo founder doesn’t necessarily mean an investor isn’t going to invest with you, but it is still a red flag, as Laurie Cercone, the CPG Special Interest Group Lead for the Central Texas Angel Network points out.
“Having a solo founder represents a lot more risk,” Cercone said. “These risks can run the spectrum of not having another founder to add checks and balances in decision making; not having a balance on skill sets; solo founder burnout; or an experienced successor if something were to happen to the single founder.
“This increased risk has caused us to pass on investments that we might otherwise have pursued.”
Featured image is of a man signing a check, which isn’t easy for an investor. Photo credit Cytonn Photography on Unsplash.