Answer courtesy of Brett Fox
, Fmr CEO @ Touchstone Semiconductor
All it took for us to close our initial funding was three meetings. That’s it. Three meetings.
The meetings lasted maybe two hours total. Then we got a term sheet, and we agreed to the terms. The final due diligence lasted a month, and then the money was wired into our bank account.
It was easy.
Now what I didn’t tell you was that 63 investors passed before the 64th investor we met agreed to invest in our company.
So maybe it wasn’t that easy after all.
And we were one of the lucky few companies that got funding from outside investors. Most companies, your company included, aren’t fundable.
There can be lots of reasons investors aren’t interested in funding your startup including:A. Your company isn’t in a segment the investor is interested in.
Are you wondering why you can’t get meetings with investors. This could be the answer because not all investors are interested in the same things.
The point is to do your research before trying to set up meetings. Only try and meet with investors that are interested in what you are doing.
Oh, and also pay attention to…B. Your company may not be at the stage the potential investor is interested in.
Investors specialize. There are angels, early stage VCs, and late stage VCs. Again, do your research because it’s really difficult to get a mid or late stage VC to invest in your early stage start up.
One more thing to look at regarding potential investors is…C. Your company will not move the needle on the potential investors fund.
Let’s say you’re building a company that has the potential to be worth $100M. That sounds pretty good, but you need to look at things from the investors perspective.
The $100M your company might be worth will not impact the return for a $1B fund. You’re better off trying to find smaller funds where your success can make a huge dent in the success of the fund.
But, it could also be…D. Your company is not in right geography for the potential investor.
I think this Marc Andreessen quote says it all about the importance of a startup’s location regarding fundraising:
Location risk -- where is the startup located? Can it hire the right talent in that location? And will I as the VC need to drive more than 20 minutes in my Mercedes SLR McLaren to get there?
So, yeah, location is really important, especially if you are early stage. Investors want to be close to their investments when a company is just starting out.
Or it could be…E. Your company isn’t growing quickly enough.
You’ve bootstrapped revenue up to the magic number of $1M/year. That’s a tremendous achievement.
However, your plan is to grow revenue to $1.5M next year, then $2.2M, and then to $3M the year after that.
That’s just not fast enough to get investors excited about your company.
Or it could be…F. Your company takes too much money to get to cash flow positive.
You could have a company that is growing from $1M to $10M to $30M in revenue, but maybe you don’t get to cash flow positive until you get to $200M in revenue.
That’s going to take a lot of money for investors to carry you. Plus investors are going to have to have faith that there will be another investor willing to continue investing because there’s no hope your company will be able to stand on its own. (Read:Why You Should Ignore The Rise Of The Unicorns).G. Your company has no barriers to entry.
You could have a great growing business that’s on the verge of profitability. And you could be in a segment that’s interesting, but you have no way to keep competition out of your segment.
That’s going to be a tough sell to potential investors.
Or it could be…H. The Investors you approached have already invested in a similar business.
It's very rare that an investor will invest at the same time in two similar companies in the same segment. If you take a meeting with an investor that has invested in your competitor assume your pitch deck will make its way to your competitor.
Or it could be...
You get the idea. I can keep going on and on about the reasons why you’re not getting funded.
You can have a great business, but it might just not be suitable for venture funding. There’s nothing wrong with that at all.
Most businesses are not going to be interesting to VCs. Do what most entrepreneurs do in that case. Rely on your own financing, friends and family, or the bank.
The fact that your company can’t raise money from outside investors doesn’t mean that it will not succeed.
There are many successful businesses that have been funded only by friends and family (remember, they are investors too). In fact the majority of successful businesses never take any outside funding.
The one fatal mistake you want to avoid is trying to adjust your business in an unnatural way to get funding. Yes, you may get funded, but your odds of failure will go way up.
For more, read: The Nine Facts of Fundraising You Need to Know
- Brett J. Fox