As a former entrepreneur and current investor, I’m often approached by friends, or friends of friends, for advice regarding their startup companies. One of the most frequent questions I get is, “Why am I having so much trouble raising money?”
Well, aside from a flip, “They just aren’t that into you,” what are the real reasons investors hesitate to invest, and what is the “investor speak” they use to communicate their reluctance?
Usually, VCs don’t invest for one of the following reasons:
- Market size appears too limited.
- The business idea fails to meet the investor’s “Is it a feature, a product, or a company” test. A feature will almost never get funded, and a product might, while a company often finds backing.
- Poor product/market fit, at least in the investor’s eyes.
- Poor articulation of the opportunity/need and the offering. The entrepreneur just isn’t a good promoter. And, yes, this matters — you have to get customers to buy, partners to engage and next year’s investors to commit. Investors want and need you to be a good pitchperson. It doesn’t mean you have to be a used-car salesman, but it does mean you need to be a good evangelist.
- The opportunity/need isn’t compelling enough, or the offering isn’t differentiated.
- Serious doubts about hitting meaningful milestones that will allow the company to raise the next round of capital after this one. This may be related to the sufficiency of the requested investment dollars, or to other questions about realistic timelines, etc.
- Lack of relevant experience on the team, or questions about the competency, savviness or commitment of the team.
- The valuation is too expensive. Don’t let this week’s eye-popping funding announcement on your favorite tech blog fool you — for every one of those, there are a hundred companies that can’t raise money at any price.
Unfortunately, investors often speak in code when it comes to feedback on why you aren’t getting funding traction. Here are a few of these code words and phrases, and what they most likely really mean, bearing in mind that an investor might throw out any of them for other reasons:
1) “We need to put more money to work than you need and/or are asking for.”
Almost always a red herring. Anyone would be delighted if you took $50,000 and turned it into $1 billion. What they are most likely saying is that you haven’t made the case that the market opportunity is large enough.
2) “We would like to see more traction.”
Either they, a) aren’t confident enough in the team without more track record/performance; or, b) they aren’t comfortable with the product/market fit.
3) “Your valuation is too expensive for our model.”
Most likely, a) they are concerned about market size; b) they are being asked to pay a very high premium with little proof that the company can grow into the premium multiple; or, c) it really is too pricey to provide a reasonable probability of a venture return (10x).
4) “The team is incomplete,” or, “We need to meet the proposed CXO before we can make an investment decision.”
Either, a) they don’t have confidence in the existing team or entrepreneur; or, b) someone on the team is really turning them off for whatever reason (often because they appear to have little value-add or are detracting from the team in some way).
5) “This doesn’t fit our current thesis.”
An easy one to validate (and one you should confirm before pitching). Most investors are pretty public about their focus. If you get this objection and you are certain your company does fit in their target area, you need to dig deeper on why they are pushing back.
6) “It’s too early or too late for us.”
Well, shame on you if you didn’t do your homework to figure out where the investor focuses their investments, stage-wise. Presuming that you did, then it’s most likely that there isn’t enough proof of viability (team quality, reference customers, product maturity, traction) if they say it’s too early; or it’s probably because the anticipated valuation is perceived as too pricey if they say it’s too late.
7) “We don’t think we will be able to get enough ownership.”
This is often true, but what they are usually saying is that the amount of risk the investor is being asked to take — and the amount of work they believe they will have to put in to help make the company successful — isn’t balanced by the ownership stake offered (or perceived to be available).
I always encourage entrepreneurs to really grill potential investors whenever they get a no, a maybe, a not now, or a slow roll. You can’t improve or make some hard decisions for yourself if you aren’t getting direct, real and accurate feedback. Unfortunately, as all managers of people know well, it’s hard to give someone negative feedback, and it takes lots of experience, practice and, yes, even training — something not all investors have. But, it’s the least you should expect for taking the time to give them your pitch, and support whatever due diligence they have conducted. Don’t be afraid or intimidated — ask for honest feedback, and many investors will give it to you.
Of course, the quid pro quo is that you have to be mature enough to take it. It doesn’t matter if the investor is right or wrong in their assessment. Sure, some investors may give feedback that you don’t agree with. Doesn’t matter! What matters is that something you are or are not doing is causing them to come to some conclusion that doesn’t result in you getting money. You need to understand what that is.
Many investors don’t give direct or honest feedback because many entrepreneurs can’t handle it, or worse, turn around and disparage the investor. It’s your responsibility to tell a compelling story around the amazing company you want or have started to build. It’s also your responsibility to handle feedback and criticism in the spirit it was intended. You aren’t learning anything if your reaction is, “That guy is an idiot,” even if it’s true. Somewhere in that feedback is useful data for the discerning listener. And one thing the really blowout entrepreneurs are almost always gifted at is asking more questions — especially “why” — and listening very hard.
Bryan Stolle is a general partner at Mohr Davidow Ventures, focusing on financial, marketing and education technology investments. He made the move to venture capital after a two-decade career that began at Ross Perot’s Electronic Data Systems (EDS) with stops at three technology startup companies. Stolle started the most recent, Agile Software, in 1995, and led it to its eventual acquisition by Oracle. Reach him @bdstolle.