Those are the words most founders hate to hear. It’s like being clotheslined! Well, at least it physically feels that way. Here you are, happily running along and BOOM! The wind gets knocked right out of you. You’re in shock. You’re confused. You’re disappointed. Honestly, after hearing those words, you’re full of mixed of emotions. And if you are able to stand there and take it all in, unamused, we’ll know we’ve done our job with this post. You’ll be better prepared the moment after reading this post.
There’s so much focus on fundraising for startups these days that this blog post is written in response to one of the the most asked questions by startup founders: “Why won’t they invest in my business?” While the answer to this varies from one business to the next, we’re addressing 5 of the top reasons investors say they don’t invest.
Which Founder Are You?
If you’re reading this post, either you are:
1.) Preparing to pitch your startup to investors OR
2.) Tired of being told “No” by investors and want to understand why
Here’s What Investors Told Us
Let’s face it, you won’t always get an explanation as to why your business was not selected to win a pitch competition or receive investment from investors, but if you allow yourself to receive critical feedback on your pitch, that would be a good start. In the event you are unable to do that or you find that there’s nothing missing from or wrong with your pitch but you still can’t understand why it’s being rejected, keep reading.
Here’s the Top 5 Comments Investors Have When the Answer is Really “No” for Investment
- “It’s too early to invest.”
- “We need to see some/more customers.”
- “The market is too small.”
- “We don’t invest in that space.”
- “That’s a competitive space.”
All of this may sound very generic to you, but it’s code for investors who don’t really want to tell you like it is. For some reason (and we have a hunch about why), many won’t quite tell the full truth behind their comment. The TPM Focus team has had the privilege of getting these statements “decoded” for you. Now, we’re not claiming that these explanations are the meaning behind every investor’s comment as stated above, but we’ve found the decoding to be quite accurate for the ones we’ve engaged.
Here’s What Investors Really Mean
1.) “It’s too early to invest.”
What they really mean is: “I don’t know what to think about this business because it’s too early to tell. You haven’t figured out enough of where this is going and what you plan to do yet. Overall, I don’t believe in the business, value proposition, or something just isn’t exciting me about your business at this time.” This is really the catch-all phrase when an investor doesn’t have a specific reason for not investing in your business, so “It’s too early to invest” is commonly heard when that’s the case.
2.) “We need to see some/more customers.”
What they really mean is: “I really don’t trust what you’re telling me and I need paying customers to believe that you can pull this off.” Underrepresented minorities hear this most often because they don’t fit the stereotype of the investor’s preconceived idea of a “successful” entrepreneur/startup founder. So, investors want you to prove that people will pay for your product in advance of them funding it. But here’s the problem: It’s a catch-22 because many times you need investment before you can create the product to get the proof that people are willing to pay for it. There are ways around this and we, at TPM Focus, specifically help founders focus on creating an MVP (minimum viable product) to acquire customers or, at minimum, creating an innovation that will prompt a letter of intent (also called a LOI) from customers who plan to purchase once you have a working prototype.
3.) “The market is too small.”
What they really mean is: “This idea of yours doesn’t excite me. I don’t know what you’re trying to do here and I really don’t think there’s enough people who consider this a problem and would be willing to pay for this solution.” In this case, it all comes down to your inability to articulate to the investor: The problem you’re solving, your solution, the uniqueness of your solution, a compelling value proposition, proof of a significant customer segment to buy your product, and most importantly, how the investors are going to benefit from investing in you.
4.) “We don’t invest in that space.”
What they really mean is: “I don’t know much about your industry, but if you were able to get me excited about your company, I might’ve given you a chance for further discussion.” We’ve heard that, when investors say this, it’s only true about 1/3 of the time. The rest of the time, they just say it because they’re not interested in investing in you and it’s an easy way out of the discussion. Investors have told us that they keep a “parking lot” of ideas that they may explore if they like the founders and are excited about the business and they are willing to learn more about an industry that they don’t know much about. In fact, many allocate up to 20% of their fund to invest in these companies that don’t fit the ideal profile of their typical investment. It’s a gamble their willing to take if they are impressed by the founding team.
5.) “That’s a competitive space.”
What they really mean is: “There’s nothing special about what you’re doing. What competitive advantage do you have that can’t be easily duplicated? I don’t see it. If Google, Facebook, or Amazon wanted to drive you out of business, they could do it tomorrow.” In other words, you haven’t convinced the investors that you have a competitive advantage in the market and they believe you could be crushed by one of the giants already in the space. Many times, they are aware of innovations that are shelved at these companies (or by other competitors that may be further along than you), waiting to be released at the right time.
Have you heard any of these comments before in your quest for funding? If so, what did you think when you heard them?
If you’re planning to fundraise now or in the future, you should download our E-Book on creating an investor pitch deck. It is sure to help you organize a concise, effective presentation with all of the most important components an investor wants to see.
If you need help with creating and practicing your pitch, contact us below.