Startups always want to scale and become huge companies solving problems and getting large revenue numbers and customers. Investors are always looking for startups that can easily scale and whose growth can make them lots of money. While the main tact between the two is based on money, a lot of things inform investors on the viability of their investments.
However, for those that seek seed rounds, below are some reasons why the investors turn them away:
1. Size of the Market
Investors want to know that the size of the market makes financial and economic sense. A huge size of the market implies possibility of a significant return on investment to the tune of 10 or more times.
The size of the market also implies the level of scale-ability of that startup. Highly scale-able investments are attractive to investors. Sometimes to prove the entire size of the market might be a bit difficult in the early startup stages, however, through the habits of the current customer base, it might be possible to estimate.
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.
Important to note is that having a team alone 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 the investment dollars.
To prevent investors from making decisions based on their gut feelings, 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 sense to your working prototype you allow the investors to invest based on their previous experiences in the space. Inform them on the traction, and specifics like details of the users, 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
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, value your startup right.
If you put the valuation too high, the investors will consider it high risk and 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 put your valuation too low, you sell yourself and your company short.
Both of these situations might affect your future rounds negatively, more so, 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 to valuation.
5. No proof of potential success
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 answer this question in various ways which may include the number of sales to date or a Kickstarter campaign you did.
“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, it’s a plus for your startup. It signals to the investors that your startup has potentials of 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 our services in SEO, Facebook marketing, Google advertising, and PR campaigns usually are newly launched companies. We usually encourage them to rake in some sales. Facebook and Google advertising is a good way to get lots of sales when you have just launched. We help you bring your advertising costs down while doubling those conversion rates.
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 to invest. Startup founders think that divulging too much information might leave them without an investment or have their ideas stolen.
While that might be true sometimes, most of the time when you don’t keep important information away from your target investors you win yourself a deal. It is the virtue of honesty and integrity. It 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 in 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. All these need to be shown.
8. 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 with it. Otherwise they will stick with the competition. Investors won’t like that or be 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
You got into the market way early 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 enough research has not been done, your product has no traction, no customers or interested investors then you are too far out. Investors will prefer to wait it out until they can be certain that there will be a market for you.
10. Lack of focus
You have too many ideas, too many features, too many business models that you cannot focus on one. Regarding features, founder of Instapaper, Marco Arment, has said before:
“Making a product better often requires removing features.”
Do not get yourself distracted 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 out 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. And as discussed earlier, spend some money on Facebook or Google advertising and get some SEO work done.
12. You are not solving a problem
You are not building a startup based on solving problems, instead, you are just building a business. 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 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 is feasible.
13. Lean concept
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 basically have 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 sign to investors.
Do you have anything to add to this article? Let us know in the comments section below.