The five reasons why investors don’t invest in your startup

Investors want to invest in a successful business. Wouldn’t you want to too? Unfortunately you, as an early stage company, aren’t successful yet.

And yet every day, around the world, tens of thousands of investors make an investment in early stage companies. Why are they getting funded and not you?

There are five reasons why investors don’t want to invest in your startup. Here’s what they are, and what you can do about them.

Reason #1: They don’t invest because you’re not successful yet

We started by saying investors want to invest in a successful business. The best way to prove that you will succeed is by doing it. By making sales, and delivering your product or service. People can’t argue with success. All they can do is line up with their checkbooks asking if you will take their money, so they can share in your success.

This is why so many investors ask you about your ‘traction’. What they mean is ‘are you successful already?’ If you’ve already proven you are succeeding, they want to invest. If they have a choice between investing in a business that has proven success, and one that has proven nothing, which do you think they will pick? Which would you pick?

There are two implications. The first is to target investors who don’t have as much choice. VCs and angel groups put up big signs on their door, get hundreds of applications every month, and have a whole team of people whose job is to read applications and say ‘no’ to them. If you’re not successful yet – if you have no ‘traction’ – then why waste your time with these people, who have a lot of already successful business to choose from?

Instead, target individual investors or angels and family offices. These are people with extra money, looking for interesting investments, who don’t have a team of people sourcing deals for them and hence have fewer choices. (These are also the people who angel groups often dismissively refer to as the ‘fools’ in ‘friends, family and fools’.)

You also need to honestly look at your business. Sometimes it doesn’t make sense to reach out to (unknown) investors, because you haven’t proven enough yet. Approaching investors is very similar to approaching customers. Put your investor-winning talents to use getting more customers for your product instead, so that when you do approach investors they are more ready to listen.

Even if you need money to get the product built, you can still talk to customers. Get them to give you something to prove they want what you’re selling, like a signed letter saying they would like to buy what you’re building when it’s ready. If they won’t give you that letter, do you really think they will buy from you later? And if you don’t have any of those letters as proof, what are you doing going to investors? Go to customers first!

But that’s not fair! What if I’m not successful yet?

Of course lots of people raise investment who aren’t successful. How do they do that?

If you want to get people to invest before you have succeeded, you have to convince them that you will succeed. Ideally you would have all of:

  • an experienced team, who the investor knows, with a track record of success, who have worked together before, in this industry
  • you have a list of signed customers and/or the investor has deep personal knowledge of your market
  • you have built a product like this before for this industry (and have a working version ready)

Let’s take each of these in order.

Reason #2: They don’t invest because they don’t know, or believe in, your team

Very few people have the ideal experienced team, that the investor already knows, with a track record of success, who have worked together before, from this industry.

Some do. Often when you drill down on the companies that raise $2M in seed capital in Silicon Valley you discover that it’s part of the PayPal mafia, for instance, where the person is known personally by a lot of investors, is working with a team everyone knows, and succeeded the last time out.

That’s not you, or you wouldn’t be reading this article, you’d be funded. The goal is still to have as many boxes ticked as you can:

  • an experienced team: if you don’t have experience yourselves, at least find a suitable adviser … and listen to them from time to time.
  • a track record of success: this one is a little unfair. Just because someone’s successful once, doesn’t mean they’ll succeed again. And it’s just something people believe. Figure out how to pitch the successes you do have. Get a successful entrepreneur as an adviser … or investor. And deal with it.
  • who have worked together before: one of the major causes of business failure is a team breaking apart, which often happens because they don’t know and trust each other enough. You’re entering a relationship as close as marriage. Don’t do it lightly.
  • from this industry: if you don’t have industry experience get a team member and/or adviser who does. Would you prefer a healthcare company with a top surgeon on their advisory board, or one with a bunch of new grads only?
  • that the investor knows: if someone knows and trusts you, they will invest based on your potential

Even if you don’t have the first four things in the list, you have the fifth: people who know you. If they don’t trust you, don’t try to start a business.

In fact, if you don’t raise any money from people you know, investors will assume it’s because people who know you don’t trust you. So always start your fundraising close to home, with your ‘friends and family’ – which includes former co-workers and other professional contacts who can vouch for you with their checkbook.

Reason #3: They don’t invest because they don’t believe you can sell your product

The easiest way to get rid of this objection is to get signed orders, or pre-orders. If you can’t get a customer to sign some sort of letter to publicly state they are interested in what you have to offer, then it’s hard to believe you can make a real sale.

This is an area where specialist industry knowledge comes into play. An investor who has specialized in this market, and knows the competitive landscape intimately, may invest millions on an idea alone (as one Silicon Valley VC told me in a moment of frankness). Why? Because they ‘know’ the product is unique, meets a market need, and ‘will’ sell (and they probably know the team).

Alternatively, if they are in the target market and a potential customer themselves, they may often convince themselves the product will sell by knowing they’d buy it themselves. This is great when you’re funding, e.g., a golfing device. So it’s worth looking for these investors.

For instance, last week I ran into a seed stage company building a dental appliance. Funding should be no problem for them, they should just approach a bunch of dentists. If they would use the product, some will want to invest in the company. In fact, any smart outside angel would want to see some dentists in the investor pool before signing up.

I know another company selling a product for women to self-test for sexual health. That’s a product where you will get more interest from female investors than male, because they can see themselves using it. And a male investor should see if any women would invest in the business first.

Reason #4: They don’t invest because they don’t believe you can build your product

In some cases, the product is easy: many software businesses fall into this category. If you want to build a networking or e-commerce platform for lovers of Himalayan snow cats, the software isn’t hard. The problem is if you have a target market who will buy. The software just takes time, people and money.

You still need to prove your team is competent at building software. If you’re stupid about software, it’s easy to blow a lot of money on a supplier and get nothing usable out the other side. Best is to have a team who have built a product like this before. Next is to have someone on your team who understands software. Weakest is to have a relationship with a software agency. In that case you’d better have a great adviser who is smart on software.

Other times the product is hard. If you have technical difficulty, people want to be sure that you can actually build what you say you can. Almost anyone can sell a cure for cancer, or a teleportation machine – if you had one that really worked.

Best is always to have a working prototype. That proves you can do it.

Next best is to have an investor who understands your field and technology enough to know that your work is exciting enough that you will be able to turn it into a working product. This is why most medical investing comes from specialized players, because they can evaluate the impact of discovering a new protein folding mechanism, and the cost of turning it into a drug, far better than the average investor can.

If your product is hard, and you don’t have a prototype, having a team that has a built a product like this before can reduce risk. If you’ve built head-mounted display systems for the military for a decade, your ability to deliver a new virtual reality headset becomes more believable.

If your business is pushing technical boundaries, you need someone who is clearly a world authority in your space involved. If you have a top MIT physics professor or someone similar involved, I will at least look at your teleportation device. If you don’t, I won’t.

Reason #5: They don’t invest because you haven’t asked them

Once you’ve done all of the above the last thing to do is simple. You need to find the investor, and ask for the money.

If you don’t ask, you won’t get.

That seems obvious, and many entrepreneurs are passionate about their product or industry, and they aren’t passionate about fundraising. So they go out, talk to 10 different investors, and after getting rejected ten times complain that investors are stupid and ‘don’t get it’. They don’t realise that fundraising is like any other sales process. (P.S. Feel free to check out the fundraising CRM included in IncMind if you need help to mange the process).

Sure, I get it. Rejection is hard. I know. I’ve been rejected hundreds of times, including by some of the best VCs in the world.

And maybe you haven’t got the investor yet because you just haven’t asked the right one. Clean up your pitch by looking at the first four things. Then get out there and ask!