Startup funding requires teams to convince investors that their idea is worth investment. You may have an outstanding idea, a detailed plan, and a strong team … so what are you doing wrong?
Over the years we (The Angel Round Table) have been presented with a plethora of executive summaries, reviewed countless documents, and listened to the pitches of hundreds of startup opportunities. Many have been based on outstanding ideas accompanied by detailed plans to be executed by strong teams. Most of these opportunities met significant market needs and were clearly scalable.
However, we did not invest in a significant portion of these startups.
On occasion, a single issue or at times a combination of issues may cause us to pull back from a strong opportunity. Some problems stand out and cause our investor group to question the logic of investing in the opportunity. Following are seventeen issues that can cause investors to question their confidence in a startup, resulting in their passing on the investment opportunity:
Investors needed a national security clearance to learn about the startup.
Angel Groups and VCs seldom execute NDAs. If a company is unwilling to share information that enables the investors to validate key elements (such as the technology and market / revenue claims), investor interest is likely to dwindle. Non-Disclosure Agreements essentially announce to the investors you are an inexperienced and naïve entrepreneur.
The management wall is higher than the Great Wall of China.
Does the founder(s) ask to participate in all conversations with key personnel such as investors, professional service providers, customers, and advisors? Investors will begin to question management’s motives and abilities. Are they controlling? Micro-managing? Can they comfortably and effectively delegate tasks to other members?
They refused their check – The Background Check.
Similar to the effect of an NDA, refusing to permit a background check by a key member of the management team may result in the investors questioning what the team is hiding.
Where’s the paper?
All startups are looking for development and growth within their company. If the legal entity, finances, and operating arrangements of the startup have not been appropriately documented, investors are likely to wonder about the team’s attention to detail. How can a startup grow if they cannot manage themselves at an early level?
The startup has a Dirty Balance Sheet.
The fact of the matter is investors hate debt. Startups that have varying and significant types of debt will always struggle with funding. Investors want the proceeds of their investment to stimulate future growth, not pay for previous expenses. They fund startups, not startup debt.
The founders have set a messy table.
Startups with large numbers of investors may seem like a well off company. However, the quality of the investors does matter. For example, a large group of small investors who are not accredited under SEC guidelines will cause questions later on. Startups may find it difficult to obtain future investment until they address these issues.
They are from the Government, and they are here to help!
Companies continuing the process of government initiated discussions with tax and regulatory agencies pose two problems. Not only are they distracted, but they also may be incurring costly legal fees and fines. Startup funding can’t be invested in growth if management is distracted and resources are required to defend actions.
The startup’s Pre-Money Valuation was what?
Extremely high valuations, especially those not supported by revenue and cash flow generation, create the strong potential for future “down rounds.” Or worse, the possibility of the startup being non-fundable in the future. Investors have no desire to invest in opportunities that are unable to obtain follow-on funding.
The founders are smart, they can do that themselves.
We are all limited with 24 hours in a day, no one is excluded from this fact. Founders who are unable to delegate are unable to scale. One person can’t bootstrap their way to unicorn status.
It’s a family affair.
Teams consisting of multiple family members will not only have additional complications and issues to deal with, but may in fact actually be family lifestyle companies. Angel groups and VCs invest in scalable companies.
Don’t hover over my shoulder.
We all have strengths, and we all have weaknesses. Diversity in experience, ideas, and approaches are the key to success. Founders who can seek out and leverage the input of their advisors and investors (smart money) demonstrate that they are coachable. Being coachable is a key attribute in leadership. Strong leadership will produce a strong company, thereby increasing chances of receiving funding.
The founder wants to be a CEO?
Investors expect the founder to be flexible enough to do what’s best for the company and its’ stakeholders. If the founder desires to be the CEO of the company in the longer term, their interests may not align with the future of the startup. As the company develops, they may not always be the best candidate for the role of CEO.
Executive team likes the figures… the six figures.
A sure fire way for investors to question your company? Present a team with six figure salaries, but are operating a startup without generating significant sales revenue or cash flow. They are proving they will burn cash quickly. Investors may question the objectives of the team.
The startup is an “All in One” opportunity.
Successful startups require FOCUS. Startups which focus on multiple markets have no focus. Remember the phrase “A Jack of All Trades” ends with “Master of None.”
So the founders have two Startups …OK great.
Investors are only looking at funding in one of your startups; which one will get your attention? Operating two startups will inadvertently hurt both companies. A founder that is consistently distracted will cause investors to question their dedication to the startup.
Investors get to invest in how many companies?
Multiple entity structures tend to be complicated. This requires significantly more investor attention then single entity structures. Investing in multiple companies also burns through cash for legal costs, which could otherwise have been invested in growth.
Message to investors, “You Must Act Now”!!
Investor groups are looking to invest in a startup business opportunity, not as used car! Sell the attributes of your team and opportunity, not the urgency of the fleeting opportunity. There is a continuing flow of new ideas and teams attempting to execute them. The main objective is to identify unique teams that will execute great ideas with strong market opportunities.