Most startup companies have the same goal: get funded by a prestigious VC who might help them scale, offer valuable connections and send a sign that the business is a comer. But everybody knows that VCs, especially the big ones, spread over 99 percent of the deals they see. So what’s the trick to getting funded?
I’ve committed to startups for days gone by 15 years and over that point I’ve seen a large number of company decks and also have personally been pitched by a huge selection of startups. Luckily, numerous deals I’ve funded have gone to raise big rounds from famous VCs. Since there is no universal answer concerning what sort of startup successfully closes an excellent funding round, here are seven conditions that I’ve noticed always kill VC interest:
The 7 Resources of Startup Capital
Everyone thinks his / her startup solves a consumer pain point. However, consider metaphorically if the pain point you solve is “aspirin level” or could it be “morphine level?” Big VCs want to spend money on businesses that solve morphine-level pain. Why? Since when pain is huge, it’s far likelier consumers can pay for the perfect solution is. Businesses that solve minor inconveniences usually hit a solid wall when they try to monetize or scale and do not usually get funded.
Given the huge risks in startup investing, I have to see that your startup may become a billion-dollar business. Yes, that’s billion with a capital B. If your target addressable market is in the nine digits, most big VCs will dismiss it as too small. A $100M exit, though it sounds amazing, usually won’t move the needle for a big fund which has billions to deploy. Big markets mean big dollars, so think BIG.
I see deck after deck proposing all sorts of mobile apps but often the companies haven’t any personnel who can in fact program or code. This destroys credibility. Outsourcing or using technical consultants won’t cut it. In the event that you don’t have a technical co-founder you’ve just about selected yourselves for extinction. Usually do not try to raise money until you can credibly indicate the person who’s likely to make the backend or technical magic happen.
When I see that we now have over four existing players in your space, or in case you have chosen to contend with existing tech monsters (Facebook, Google, etc.), you better have a bulletproof story about why your business differs. Compelling business models will often have hardly any real competition, because they’re attacking the marketplace creatively and doing a thing that hasn’t been done before. It could be much harder to get funded as a “me-too” business.
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In Peter Thiel’s book Zero TO 1, he says that your product must be 10X much better than whatever happens to be out there to get breakaway traction. I agree. Anything significantly less than 10X won’t create consumer passion that’s sticky and viral. As a CEO of a technology company myself, I understand that making something even 50 percent better is hard, so 10 times may sound crazy. However in our hyper-competitive economy, it is advisable to come to advertise with something that isn’t only incrementally better if you need to get funded.
Frequently, I hear a pitch that says something similar to “our marketplace is X billion in proportions, and if we are able to get Y percent of it, we are Z billion in revenue.” Nobody ever believes this top-down fluff, so just avoid it. You ‘must’ have a bottom-up analysis that starts with the machine economics of your product and shows how you’ll get to the first million in sales. That first million could be the hardest revenue you ever get, if you can convince me that you’ll beat the chances and get there, it creates it far easier to trust your scaling story.
This can be the main. Remember, ultimately VCs are buying people. No matter just how much I love your product, if the CEO and team usually do not exude passion and confidence, I pass each time. As anyone who has founded and built businesses, I understand every startup will face "going concern" risk at some time over the first couple of years. Sometimes the thing that keeps you going is passion and confidence. So ensure you believe your own story and that you truly love your product, because everyone in the area can tell instantly.
In the event that you avoid the pitfalls in the above list, you’ll have a far greater potential for raising a round with an excellent VC. All the best!
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