Not every startup is a good fit for venture capital (VC) funding. Although venture capitalists certainly have money to invest in high potential companies, they are also extremely picky, and awash in business opportunities.
“There is more competition than ever among VCs and among founders to get a VC’s attention,” Justin Izzo of DocSend said. “That’s why we see record-level investor activity just clicking through decks, but correspondingly, record low time, because investors are always searching for the next best deal.”
To get off on the right foot, Teo Chung Pin, a Singapore-based Incubator, says not to just ask for money, but make the case that there is a particularly alluring partnership to be had. "Be able to explain why your VC (or an incubator) is the ideal firm to add value to your startup," he says. Make clear why you believe there is a fit. Chung Pin, for example, is hyper-focused on the IoT and IIoT industries.
If you do make it into the room and you have the chance to pitch your business to VCs, make sure you're not sabotaging yourself. Here are some common reasons VCs pass on business pitches.
Pitching an Incomplete Presentation
In addition to putting together a winning pitch deck, it's critical to know your numbers inside and out. The details should be second nature. Or, as Chung Pin says, "Have your complete pitch, including financials, down to a science."If you can't answer in-depth questions about your operations or how and when you'll become profitable, don't bother, Chung Pin says.
Staffing an Inexperienced Team
“If the startup doesn’t have the right team to execute the idea, even the greatest business concept might result as a mediocre product. We invest both in the idea, and the people,” says Mikko Huumo from Helen Ventures.
VCs look at many aspects of the team, such as industry experience, skills, and personalities. Additionally, they also look at how the founders deal with feedback. Do industry insights lead to actions, or are they ignored? This gives strong indication how the collaboration will work.
"VCs want to see a company that reflects a balanced team with amicable relations and both technical and business acumen," Izzo says. He will typically pass on teams that "are not populated by one or more individuals who have intimate knowledge of the market problem they are trying to solve." He also stays away from potential business leaders who "have a low level of self-awareness," meaning they are not aware of their own strengths and weaknesses.
Presenting with No Supporting Evidence
If you’re lucky enough to have made progress on your business and have evidence that your business is going to be a success, you’ll want to talk about that, too. For example, if you have pre-orders for your product or other evidence of strong customer interest, investors will want to hear about the successes you’ve had—this is often called traction.
Building a strong business case is essential to attracting the attention—and enthusiasm—of VCs. Not having evidence to support your case is a surefire way to end a conversation.
"Having evidence to support whether a market is ready or not, versus having an opinion, is the difference between a swing and a hit in startup investing," Izzo says.
Offering No Clear Path to Profitability
In short,
- Businesses lacking strong unit economics will struggle to be funded by VC firms, no matter how good the concept.
- CFOs who held fast to fiscal restraint will be rewarded.
- Growth is always important, but it’s critical that it be sustainable
Chung Pin also says "we don't know companies who have interest to invest in companies that are going to just go out and get eight rounds of funding and not focus on getting in the black. So we ask them, what's your Plan B if you weren't to close this round of funding? how long until you self-sustain?' If they cannot explain properly, neither the company nor us will be interested."
The good news is that if you can avoid these pitfalls, your odds of at least hearing back from a venture capitalist dramatically improve. But also consider that venture capitalists may not be the best place to start.
Chung Pin suggests that venture capitalists shouldn't be your first ask. "If you are just getting started, raise from angel investors first, build traction, and then reach out to VCs."
Demonstrate acceptance to coaching
"I've seen way too many companies fail because the founder isn't open to viewpoints other than theirs," Chung Pin says. "If I sense that founders aren't actively listening, are 'excuse-making' in their responses, are dogmatic, or don't seem like they're going to accept alternate pathways, I pull out."
VCs are likely to stay clear of startups who are unwilling or unable to consider fresh perspectives.
