Review these 13 common reasons why investors reject startup pitches to improve your chances
As an investor, hearing a startup pitch can be an exciting experience. However, not all pitches make the cut. In fact, we’ve compiled a list of 13 common reasons why investors reject startup pitches, and understanding these can significantly improve your chances of securing funding. From lack of market research to an unclear value proposition, each reason sheds light on essential elements that can make or break a pitch.
Investors are constantly seeking innovative ideas with high potential for growth, strong execution strategies, and a clear understanding of market dynamics. This article will delve into the core reasons that often lead to rejection, providing valuable insights for entrepreneurs looking to fine-tune their pitch and approach investors with confidence. So, if you’re an entrepreneur gearing up to present your startup to potential investors, or simply a curious mind eager to understand the dynamics of investor decision-making, you’re in the right place.
However, for those that seek seed rounds, below are some reasons why investors reject startup pitches:
1. No information about the size of the market
Investors want to know that the size of the market makes financial and economic sense. A huge market implies the possibility of a significant return on investment to the tune of 10x or more.
The size of the market also demonstrates the level of scaleability of that startup. Highly scaleable investments are attractive to investors. Sometimes proving the entire size of the market might be a bit difficult in the early startup stages. However, by evaluating the habits of your current customer base as well as those of your competitors, it’s easier to estimate the size of the market as a whole.
2. No team
Reid Hoffman once said:
“No matter how brilliant your mind or strategy, if you are playing a solo game, you’ll always lose out to a team.”
It is difficult to attract investments from potential investors if you are not working on your startup with a team in place.
It’s important to note that having a team in itself doesn’t cut it. Investors require certain values from your team. Startup teams need to be consistent, committed, intelligent, smart, and fast.
The team in your startup will define the culture, future, and decisions that will push your company ahead. If you have a team that is technical, business-oriented, complementary, and with previous experience, you will get those investment dollars.
3. No product information
To help investors make more informed and more confident decisions, you should provide them with valuable metrics and insights about your minimum viable product (MVP) or working prototype. This is most important when your MVP is at its very early stages.
“No growth hack, brilliant marketing idea, or sales team can save you long term if you don’t have a sufficiently good product.” ~ Sam Altman
When you don’t provide the metrics that give insight into your working prototype you allow the investors to invest based on their previous experiences in the space. Inform them of the traction, and specifics like details of the users, the current speed of growth, projected adoption in the coming months, etc.
“Make your product easier to buy than your competition, or you will find your customers buying from them, not you.” ~ Mark Cuban
4. The wrong valuation
Kevin Harrington describes this best:
“Nothing turns off an investor more than when an entrepreneur comes in with a ridiculous valuation.”
This comment just goes to show how much the valuation of your startup might be turning off investors. When you go to approach investors, make sure you value your startup right.
If you set the valuation too high, the investors will consider it a high-risk investment. In order to manage this risk, they will want to own as much of your company as possible to protect themselves against any future losses, push down that valuation and become major decision-makers in the company. If you set your valuation too low, you could sell yourself and your company short.
Both of these situations might affect your future rounds negatively – especially the exaggerated valuation. Future investors will turn their backs on you if you have not lived up to the hype placed in your previous seed round as regards valuation.
5. No proof of potential success
Let’s assume your investors have not found any single evidence that your startup could be or is a success. This is a bad first impression to put up. You can demonstrate proof of potential success in many ways, including the number of sales to date or the results of a Kickstarter campaign you ran.
“A board member of mine used to say sales fix everything in a startup, and that is really true.” ~ Sam Altman
If you or anyone in your team has successfully launched a startup before, this is a plus for your startup. It signals to the investors that your startup has the potential for success and will be worth their hard-earned money.
“Don’t optimize for conversion, optimize for revenue.” ~ Neil Patel
Most of the time, the companies that come to Pressfarm for PR campaigns usually are newly launched companies. We usually encourage them to rake in some sales both for their bottom line and as social proof. Facebook and Google advertising is a good way to get lots of sales when you have just launched. When combined with a custom PR campaign from Pressfarm, your social media strategy can take your brand to the next level.
Additionally, we advise that they start working on their PR and SEO campaigns. SEO and public relations are two facets that take some time before you start seeing results. However, if you are using Facebook or Google to advertise, you should be getting some profit to invest in SEO and public relations. Getting customers from all these directions is also credible proof of success potential for your startup.
6. Openness is lacking
When you go to speak to investors but try to keep some information from them, they will become very skeptical about investing. Startup founders think that divulging too much information might leave them without an investment or get their ideas stolen.
That might sometimes be true. In reality, most of the time when you give investors the impression that you’re keeping important information from them, you can cost yourself a good deal. Investors value honesty and integrity. Your level of honesty with them proves how honest you are as an entrepreneur.
7. No business model or plan
Your business model or plan basically answers one major question: “how are you going to make money?”
If you don’t have this answer then it becomes hard to convince an investor to put their money into your startup. A startup without a business model or plan doesn’t have direction.
“A business model that hasn’t been tried before is always interesting even if it is likely to fail.” ~ Michael Arrington
While this information could be in the heads of the founders, it is important that it is documented and ready to be provided when needed. Also important to note is that your business model and plan could change depending on changes in the market and metrics from your customers. You need to indicate all of this in your business plan.
8. No uniqueness in the market
Startups that copy and paste ideas without adding value to what the existing competitors offer are very likely to be turned down in seed rounds.
You have to offer something unique in your product to ensure customers are convinced. Otherwise, they will stick with the competition. Investors won’t like that or be a party to it.
Joel Spolsky, the co-founder of Stack Exchange said:
“Nothing works better than just improving your product.”
9. Timing – too early or too late for the market
Perhaps you got into the market way earlier than you should have or too late and people have already forgotten about your product. Both of these scenarios are detrimental to the growth of your company.
“Don’t spend too much time trying to choose the perfect opportunity, that you miss the right opportunity.” ~ Michael Dell
Timing is one of the key elements that spurs growth. It is okay to want to revolutionize your business niche. However, if you have not done enough research, your product will have no traction, no customers, and no interested investors. Investors will prefer to wait it out until they can be certain that there will be a market for you.
10. Lack of focus
Maybe you have so many ideas, too many features, and too many business models that you cannot focus on one. Instapaper founder Marco Arment has said before:
“Making a product better often requires removing features.”
Do not get yourself distracted by the need to build as many features as possible into your product as this turns investors away. They like to see a team with a focus. What is your startup’s focus in terms of the main idea and by extension the main feature? What business model is your startup focusing on?
11. Marketing strategy is poor
You don’t have a marketing strategy. You have spent time developing a product and business plan, but no strategy to get it out there. Investors will tear you down without mercy.
Develop a strategy to get the word out about your product. A marketing strategy works very well in conjunction with a PR strategy.
Reach out to journalists and build media relations long before your product launches. Start spreading the word about your startup early by securing startup directory listings and using content marketing. These are just a few strategies that could spur your growth and show investors that you have a plan to get your startup known.
12. You are not solving a problem
Maybe you are not building a startup based on solving problems, instead, you are just building a business. If this is true for you, then you are not an entrepreneur. Entrepreneurs solve problems and make money while doing it.
“Fall in love with the problem, not the solution.” ~ Uri Levine
Some startups start out by providing solutions to problems but eventually lose sight of the problem and turn the solutions into businesses. You have to keep your eyes on the problem, and keep providing the solution because that is a major guarantee that your startup will be feasible.
13. Failure to adopt the lean concept
Perhaps the problem is that you are spending money on too many things that don’t matter. You are overpaying yourself because you are the CEO. You are hiring faster than you are growing. In summary, you are burning through money so fast that it doesn’t make economic sense.
“Don’t be in a rush to get big. Be in a rush to have a great product.” ~ Eric Ries
You have basically focused on putting out a big company picture by spending large sums of money on salaries and promotional offers instead of focusing on validated learning and product development. This is a huge red flag to investors.
Raising funds for a business is no easy feat. In fact, it might be one of the hardest things you ever have to do as an entrepreneur. For this reason, it makes sense to learn how to pitch your business to investors the right way. If you want to win investors over, you need to avoid making the mistakes above.