If you’ve tried and failed to earn venture capital funding for your startup, you’re far from alone. According to the Harvard Business Review, venture capital (VC) firms fund less than 1 percent of startups in the United States. That means that for 99 percent of business founders in America, this form of support is likely out of reach.
There is an untold number of factors that can prevent companies from earning the confidence of a VC firm. However, if you’re among the small percentage of business owners to earn an audience with partners at a well-established venture capital firm for a pitch meeting, you’re ahead of the game. In the event that you’ve made it to the meeting room, the reasons a VC firm may pass on your startup are much more straightforward and tend to have something to do with either your market, your business operations, or your leadership team.
Read on for an in-depth look at some of these reasons.
1. A common problem with the market: Your target market isn’t big enough
No matter how good your idea is, a VC firm isn’t going to invest unless there’s potential for major return on investment (ROI). Your startup’s potential annual revenue, once established, must be lucrative enough to make the investment worth the firm’s time. Seasoned VCs will emphasize that venture capital is a long-term strategy in which the firm typically doesn’t expect to see returns until three to seven years after the initial investment. Because of this, they look exclusively to identify big wins (i.e., companies targeting a market with untapped, explosive potential or companies with slow momentum that show signs of picking up speed).
If your business market doesn’t have the potential to offer returns of 10, 100, or even 1,000 times the original VC investment and you can’t think of a way to connect your business to a larger ancillary market, then your company is unlikely to be chosen for funding.
2. A common problem with your business: Your product lacks innovation
In other words, is what you’re doing easy to replicate? Again, VC firms are focused on long-term, high-ROI projects. If your company is offering a product or service that isn’t difficult to reproduce, market competition could wipe out your profit margins and leave VCs without an outsized exit (their ultimate goal). The same thing can happen if you’re entering an already crowded field, hoping to differentiate your company from others offering the exact same things.
VCs are more likely to bet on a company that is creating a new industry or has the potential to dramatically disrupt an established one, particularly if you’re offering a difficult-to-copy technology.
3. A common problem with your team: Your team dynamics don’t work
Most VCs will say that the most common reason they choose not to do business with a promising young startup involves the team leading it. A strong team that works well together is key to the success of a startup, and when they’re considering investing in a company, VCs will look for signs of negative dynamics to identify potential problems.
VCs rely on different signs to determine whether a team is cohesive and prepared to take on the difficult task of growing a startup together. These include startups that maintain both a CEO and a president (this can signal that the two leaders have egos and are concerned with appearing “lesser” than their co-founder), having too many co-founders with similar job titles at an early stage (for example, maintaining a CEO, CFO, COO, and CSO before the business has any measurable success), and personality red flags.
Though it can be difficult to reflect on our own behaviors, it’s important that startup founders realize how domineering, critical, rude, or egotistical behavior reflects on them as a prospect for venture capital funding. The most talented VCs will want to be more than just a check; they’ll be a partner and resource for achieving the business’ goals. In this regard, they will always carefully consider the founder—the person they will be working with side-by-side to promote growth—and how he or she treats the people on a startup team.
A closing thought
One thing for you to remember about securing VC funding is that there are always going to be things about the impression you make on a potential investor that you can and can’t control. It’s important to realize that the goal of securing VC should not be pursued at any cost. It’s critical to the future of your business and to your own satisfaction in your work that you see eye to eye with the VCs you’ll be working with—both philosophically and in terms of goals for the company.
Venture capital funding has its perks, including mentorship from talented VCs experienced in startup growth as well as the financial means to take your company to a level that would otherwise be nearly impossible. Still, it isn’t right for every startup. The overwhelming majority of successful startups today manage to achieve success without the assistance of angel investors or venture capitalists.
If you want to decide whether venture capital is the right decision for your startup, consider reading about the myths and facts about VCs and what these firms aim to do for the companies they work with.