Investors look for success before committing their money to a startup business. That only makes sense – doesn’t it?
And so a startup business faces the challenge of demonstrating their success, often before they’ve had the chance to prove themselves in the market place. It sounds like an unachievable exercise.
And yet everyday investments are made in early-stage companies. What is the magic formula that makes one startup appealing to an investor while others are not?
There are a variety of reasons why investors find startup ventures attractive. In some cases, it is a case of timing or good connections. To some degree, you must be in the right place at the right time.
However, there are 10 undeniable reasons why an investor chooses NOT to invest in a startup. If your business has any (or all) of these roadblocks, the best luck in the world won’t help you.
Let’s take a look at them.
10 REASONS INVESTORS SAY NO & HOW TO AVOID THEM
#1: No history of success
Investors want to invest in a successful business. The best way to prove that you will succeed is to show a history of success. Having tangible proof – in the form of sales or committed orders – generates a level of confidence that the marketplace will support your business. Ultimately, success shows that your business is more than a concept. That is very attractive to a potential investor. The greater your demonstrated success, the more investors you’ll have lined up with their checkbooks begging you to take their money. Everyone wants to be a part of a successful team.
If you have a great product but lack the funds to manufacture or deliver a customer’s order, ask for a commitment to buy. Showing an investor that you have orders ready to be fulfilled is the next best thing to actual sales.
#2: No skin in the game
Any smart investor is going to look at a potential deal and see how much “real” money the founders have in the business. If an owner lacks equity in the company – in the form of invested money – investors will question the ownership’s commitment to the business. It is much less likely that an owner will walk away from a venture that holds a large chuck of their money. Commitment to the business is the basis for a strong partnership.
If the true capital you have invested in the business is small, be prepared to demonstrate what you are willing to re-invest as the company starts making money. Be very clear about amounts and where that money will come from. When you take a second mortgage on your house or sign a personal note with a bank to invest real money in your venture, you send a strong message to investors. You show them that you are willing to take a personal hit if the venture fails. Investors need to know that you cannot walk away from the venture without suffering an economic loss.
#3: They don’t believe in you or your team
Investors want to know and believe in you and your team. While some entrepreneurs have lots of experience, many others do not. If you find yourself with more passion than experience on your team, you can still be successful. Take your time and develop the strongest team you can.
Below is a list of considerations to take into account when developing your team:
Experience: If you don’t have personal experience, find an adviser and listen to them.
Success: Surround yourself with people who have had success in business. Document your business successes and milestones – even if they seem minor.
Industry: If you don’t have industry experience get a team member or a group of advisers who have worked in the industry.
#4: 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 a letter stating their interest in what you have to offer, it is hard to demonstrate the marketability of your product and/or your ability to sell.
Without actual sales or commitments, you may need to find an investor who specializes in your specific industry. An investor who understands your market, and knows the competitive landscape intimately, may invest on an idea alone. Why? Because they ‘know’ the product is unique, meets a market need, and ‘will’ sell.
Also, if a potential investor is part of the target market or possibly a customer themselves, they be convinced that the product will sell by knowing their own needs.
In either case, when you lack specific sales experience, look for investors who understand and believe in the marketability of your product.
#5: They don’t believe you can build your product
The best bet when trying to raise capital is to have a working prototype that proves you can deliver when the orders arrive. As Michael Dell stated, “Ideas are a commodity. Execution of them is not.” Show your investor something tangible, if it is a product you are going to make show them a prototype. If it is a website, show them the beta site.
Without a prototype, look for investors who understand how to make and distribute your product. They will be able to evaluate your business while also understanding the requirements to ramp up production. Whenever possible, create a team that has built similar products before. This will improve your ability to convince a potential investor of your business’ vision and a path to a viable, profitable product.
If your product is cutting edge, or new to the market place, it is recommended that you have experts on – or associated – with your team to build credibility with investors. Having a well-recognized expert in the field will play a huge role in validating your idea.
#6: Make sure to build a business, not a hobby
Many new business owners make the mistake of trying to create a business out of a hobby. They have a passion and friends who share that passion. That makes their idea seem like a real winner. And, to be fair, some hobbies have gone on to be very successful businesses.
However, to an investor, their concerns surround the notion of not only getting their investment back but also earning a return on that investment. They need to see your plan that concisely and effectively shows them that the path forward is one in which you will grow a successful business. To tell the difference, consider these points and see if you have the answers documented in a form that will impress your potential investor:
- What are the unique strengths and weaknesses of my business and my team?
- How will I reach these people and convince them to purchase?
- What will my revenues be for the first year?
- Will I make a profit?
- When will I get paid?
- When will I pay a dividend to my investor?
- What is my plan to grow the company – short term, long term?
All these questions (and more) are generally part of a business plan. If your business doesn’t have an official business plan, you risk having potential investors dismiss you as a hobbyist.
#7: Lack of an exit strategy
With great risk comes great reward and potential investors are going to want to see a clear path to recouping their investment and making a nice profit. Wise entrepreneurs will tell you: when starting a business, begin with the end in mind.
Investors already know the level of return they need in order to justify their investment in your business. When you paint them a picture of that return, with credible financial and operational numbers, you are showing an understanding of the business and demonstrating a respect for their investment. These are the elements of a strong partnership and will alleviate their fear of losing their money or tying it up without a positive return.
#8: Lack of Failure
It’s natural to want to emphasize our successes and sweep our failures under the bed; but investors are looking for the kinds of business partners who are honest enough to acknowledge that they’ve gotten certain things wrong – made mistakes – both of omission – and commission. It
Starting a business is a messy process – and learning only happens when we get our noses bloodied – survive – learn from it – and move forward along a different path. We’re more credible to prospective investors when we openly talk about what we’ve learned as we’ve made mis-steps. The investor is more interested in seeing your scars – than your halo.
#9: Lack of Strategic Vision
You can often have a great idea or a great product, and still be shunned by investors. Chances are, you went wrong in articulating your strategic vision for that great product or great service. Are you taking your business to market in the most efficient manner possible? Will you get the greatest market penetration possible? Does your strategy provide maximum protection against competitive threats? Are you foresighted enough to see that a different pathway to distribution might be more lucrative? Have you engaged the right strategic partners?
Many entrepreneurs want to get a trophy more than they want to maximize their profits. Do you put too much emphasis on things like sourcing local suppliers, employing people, maximizing margins at the expense of distribution? Are you overly concerned about control? Are you averse to licensing arrangements, alternative markets, applications, product variations, foreign manufacturing, etc.
It’s okay to have core principals – but investors care about money more than principal. What’s more, they understand that principals are best served when capital seeks out the best solutions – taken to market in the best way.
#10: The numbers don’t work
As CFO consultants, we often see a familiar pattern when reviewing the financial projections of our start up customers. We refer to these charts as ‘hockey sticks’. They start out with meager results – few customers, low revenue, little or no profit. The next thing it shows is meteoric growth. The anticipation of the ‘hot new product’ hitting the market can generate excitement that sometimes skews the projection in an overly optimistic way.
While it is exciting to start a new business, the reality is that even the most successful enterprises take time to get started. Prepare your business plan and financial projections with a realistic expectation about the challenges you will face. This shows an understanding of the business and your commitment to making it through the tough times. Investors expect you to have a firm grip on the cost of goods sold, overhead, payroll, the pricing of your product. Your initial business projections should represent that reality.
Engage an accountant with CFO experience to help you develop your initial projections. Listen to what they have to say. A good accountant understands the obstacles a startup business can face and will help you anticipate these roadblocks. They will also provide a ‘reality check’ for your expectations and help you build accountability into your plan.
Remember, after you get your investment, you will have a partner motivated to see the expectations you projected come to fruition. If those numbers were ‘best guesses’ or unrealistic, the relationship can become sour. If your numbers are realistic, and you have an experienced accountant/CFO on your team, you’ll be able to weather any slow times and keep everyone on track.
Our mission is to help business owners get a good night’s sleep. It’s difficult to nod off when you feel anxious because your books are behind, incorrect or difficult to interpret. Let us take the accounting and CFO piece from you. The piece that is necessary, but perhaps not your strong suit. Our services will provide financial clarity as well as free up time for other pursuits. We will help you chart a course to get you from where you are to where you want to be. The only thing we care about more than your business is your peace of mind.