15 Reasons that would Put an Investor on the Run from Startups

By | May 25, 2015

Funding is vital for any startup, without which the whole business could come to a full halt. Fund from the external investors are very important and common form of funding. After deciding the right investors for the company, approaching and convincing them to no easy task. Funding capital is a scare resource and so there are many trying to reach it. It is in the hands of the startup to beat out various competitors in the market to win the favor of the venture capitalists. Mathew Castel, head of Strategy and Global Macros at Logos LP warns, “No matter how good your business or investor pitch is, securing investment often take months and sometimes even years.” He also added that attracting investors is a social practice – it is like telling a good story. One has to be very careful while doing so. Almost all startups need funding, but not all get it. There are various reasons why many startups do not get funding. If the company does not catch the investors from the right side, it may fail to attract investors.

Every investor wants to bet on the winning horse. They try to add fuel to the burning fire, not start the fire itself which is the job of an entrepreneur. An investor would aim to make money out of a startup it invests, not try something new and wait for years. If the business is not investor-ready, there is no way it can attract investors. Here below let’s look at the common reason that could discourage an investors from investing in a startup.

Hand with a calculator. Money saving concept.

1.Hardly any prospects for success:
Unless the startup entrepreneur is able to prove that his/her company is worthy of pouring in cash, there is no way possible to make investors head turn. Powerful campaigns and aggressive marketing may be required convince the investors that business idea is strong enough to generate revenue. But unfortunately, so many of them get caught up with their smaller business plan and lose focus of the bigger picture. The investor needs to have clear details on the traction of the idea, demand and the actual market from the owner. If the entrepreneur has another startup that is doing successful in the field, it would be an added advantage for him. But when things are vague and the business idea lacks clarity, there is no way the startup could gain investment from investors.

2. Overestimating the value:
For an entrepreneur, his startup is his baby, his world, so there are high chances for him/her to value the business more than anybody else. But it may not be the same for an outsider. Usage of the words like ‘unparalleled in the industry,’ ‘superb returns with limited capital investment,’ does not mean anything to the potential investor, for he knows they are just assertions and hype. The potential investors would look into the factors and will cut through that figure straight away. Care should be taken to value the company correctly and give evidence to show where the company has reached and where it is heading. Unless the startup shows proof of the past achievements and it potential for future, an investor would not see any hope in investing in the startup.

3. Lack of trust:
When an investor looks at the potential company, it looks more at its founders and the person who is going to run the show is very important. The connection and the relationship between the investor and the entrepreneur is vital. An investor would first invest his time and effort to access an individual with the aim of ascertaining his or her management skills. If the investor is not able to trust or does not have the feeling to work with the person, then no matter how awesome the product or service is, getting fund from him would be close to impossible. But at the same time, if the founder or the entrepreneur is capable of winning the investors integrity and trust it can help him in score more even if the business prospects are lacking behind.

4. Lack of business plan:
It is a must for a startup entrepreneur to have a proper full-fledged business plan, despite of the size and field of the business. It should be crystal clear, precise and should have details on what the business intends to do on long-term. Clear organized business plan indicates a clear mind of the entrepreneur and that is the reason why it is an important piece of the puzzle. Failure to produce an effective business plan without enough detail, will fail to grab attention and interest of the potential investor.

5. Lack of long-term vision:
A startup should have focus and plans for long-term. It should not be completely based on the current trend alone. There is not point is expecting a company to survive in long-term when it just based on the contemporary trends nor will an investor be convinced with it to invest. Inability of the entrepreneur to predict and forecast the future of the product, will fail to win the heart and the money of the investor.

6. No clear marketing strategy:
A strong market strategy will help the company quickly grow the product and services that the company is trying to build. The target customers should be well aware of the product and the services launched in the market. If the strategy is vague, the competitors in the market will outperform the startup. Marketing plan has to decided and planned much before the products hit the market. The marketing strategy as a plans need to have details on promotion of the product, boosting sales and means to stay ahead of the competition. Lacking of these detail, will lead to lack of investor interest on the company.

7. Lack of efficient team:
An entrepreneur cannot do everything needed for a business to run. The business should have capable and efficient employees to ensure success of the business. The investor may be impressed with the management skills of the owner but if the team lacks the potential and the strength, investors can lose the trust on the company. Because ultimately, it would be the team doing the job and meeting up with the deadlines. Thus, it is really vital to ensure the work team is qualified enough to do the job and can evidence their experience, taking the company on the route to success. Not able to choose and setup the right team, makes the investor doubt the potential of the entrepreneur.

8. Lack of exponential growth:
Professional VCs look at the exponential growth of the company and a steady linear growth cannot impress them. Steady linear growth is the right way to build a bootstrapped business but to get external funding, it would not be enough. There are a common myth going around that a company can get exponential growth when they are funded. But it has to be understood that a funding cannot change things. It cannot change the growth track of the business from linear to exponential. The funding from the investors would only be to help accelerate the growth. If the company has not experienced exponential growth, there are high chances that the company working could be flawed.

9. Lack of uniqueness:
If the startup deals with the products and services that are already prevailing in the market, it would not attract the interest of the investor. Most of the investor would want to pool in the cash to a new idea in the market and want the business to have a niche market. If the business is not new, it should at least try to develop products that are new to the market. If not able to create a new business model, then the entrepreneur has to forget about convincing the investor to invest in the company. Most of the investors will deny to fund companies that do not have new idea, unless or until they can clearly see how the company can overtake the competition.

10. Lack of understanding customers:
Founder who are capable of running a successful business will have the ability to look at customers problems in-depth and solve them. They would be sharp in observing and have in-depth knowledge on the customers profile. They will value and understand their customers hope, fears and desires. Every customer problem would be deeply evaluated and best possible solution would be arrived. If the startup is not able to solve the problems for its customers, even a smart startup will end in obscurity. For instance, developing a gadget to track and under soil better for farmers. It is sure to help them earn more money. But before that, one should understand if the customer would be capable to get such gadgets and understand its working mechanism. A company should be aware of dream, motivations and capability of its customers to run a fundable business.

11. Focusing too much on the money:
Well! Everyone needs money. But care should be taken to ensure that goal is not overtaken or covered by the need for money. If the investors feel the need for money is over striding , they would choose to step back or halt to invest in the company.

12. Lack of interest from other investors:
If a startup cannot attract or rope in other investors, chances are there for the company to be considered obsolete. It may raise question, why no one has shown interest so far and what is wrong with the company and so on. If other investors are supporting the business, it gives the new investors courage and confidence to invest money. In short, the investors do not want to risk their money into something which other have avoided.

13. Not being honest with the investors:
Any investor would expect the founder to be 100% honest with them. If not every deal, they deserve to know the basics. Investor has to know about the working of the complete business model and how it can generate revenue. Some founder have a deep feeling that the investors may steal their ideas and start something on their own. If that was the case, the investors should be running more than 1000 startups with their own investment. Without being honest, the trust cannot be built between the investor and the founder. Also, founder should understand that there is no necessity to reveal every single detail of the business but also make sure there is no major leaf left unturned for the investor.

14.Not willing to listen:
Investors can easily understand if the entrepreneur is sharp and can learn things quickly and is being willing to lend his ears to positive critics. He has to list at all time and take in the goodness of the meaningful advice from those investors who have seen countless startup rise or fail. Taking things too personal and not open for suggestion would only make the company and the founder more rigid and would send a warning to the investors to take a step back.

15. Lack of approaching investors formally:
A founder to gain investment have to do a thorough research and get information from other startup owners regarding the investment process. This would help the startup get referrals and recommendations to investor which would not only lead a way to approach but also build some trust for the investor about the company. But unfortunately, there are many who would email every single investor they hear about. Of course, no investor would be ready to invest on someone or some company that does not have the courtesy to approach formally.

The upcoming startup and entrepreneurs should ensure they do not ignore the above discussed pointers and check if their company could be affected by any such mistake. Minimizing these mistakes can maximize the startup’s chances to attract the interest of the potential investor for their financial support.