Note: The full article on this topic first appeared on Mashable. You can read it here.
We’re seeing a number of new ways in which early stage companies are raising capital, and an increase in the number of people investing in startups to get them off the ground. Just look at the data. The number of seed rounds in the U.S. alone has multiplied ten times in the last six years and the capital to fund these companies has more than tripled.
That’s why now it’s a great time to start a company. Not only is there more capital available, but the costs to start a company have decreased significantly. As companies continue to innovate on the ways they structure their business and develop new revenue streams, business models themselves are changing.
It’s a very exciting time to be a startup, yet many companies are still unable to raise funding early enough to get off the ground. If you are finding yourself in that position, you’re likely wondering why you’re having trouble raising funds if the market is doing so well.
There are three common mistakes that early stage companies make when pitching to VCs.
Here is why investors might be saying no to investing in you:
1. You are targeting the wrong VCs
Many of the reasons why a VC may say no to investing in you have little to do with the quality of your idea or your team.
A few reasons when this is true:
- They are late in their fund cycle.
- They have sufficient investment in a given industry.
- They deem the opportunity as competitive or too similar to an existing investment.
- The opportunity may be out of their domain expertise.
At Avalon for example, we invest only in the technology and life sciences sectors. We’ve made nearly 100 investments in these two sectors and have doggedly kept our focus on investing in early stage companies.
Due to all of the factors above, it’s important to do your research before you start pitching VCs. You should ensure that the VCs you are targeting have a focus in your industry without being over-invested, or invested in a competitor. While some of these factors might be hard to determine from the outside, know that if a VC says no to you, there may be nothing wrong with your idea or your team but rather an issue of timing or the fact that a given company idea falls outside of their industry knowledge.
2. If a VC can’t say yes to three important questions
I’ve found that there are three important questions I must ask myself when startups are pitching for investment:
- Will it work?
- Can I win?
- Is it worth it?
If I can’t answer all three with a resounding “Yes!”, Avalon is unlikely to invest.
If we’re going to go to battle together (and we will if we do work together), I need to be able to answer these three questions to get us through the tough times.
These important questions have shown their value to me time and again and are a great way to simplify many complicated investment decisions. They also help to test our conviction and maintain our confidence to continue investing when a company runs into a challenge along the way.
3. You’re building a feature, not a product
Many startups believe that as long as they build a great feature, a larger company will acquire them. While this approach can work, and can be a successful way to get an attractive return, it often fails to attract the attention of investors who are more interested in a larger outcome. Typically the most successful acquisitions are companies that have built something innovative and complete. These are of more value to everyone involved.
For example, take the acquisition of our portfolio company, CloudKick by Rackspace. In the acquisition announcement, they said, “Cloudkick’s platform is comprehensive, which makes it an attractive buy for a company like Rackspace.” The key here is to demonstrate your ability to do something so well that an acquiring company cannot imagine a better way to do it.
Your Next Steps
Raising capital takes a lot of time and energy. In cases like the ones described above, there may be better ways to finance your startup than venture capital. You should also consider crowdfunding, bootstrapping or a small business loan. Before deciding which type of funding to go after, first understand the factors a VC will consider before investing in you, as I described above. If you are targeting the right sources of capital, then ask yourself and your team tough strategic questions before pitching. This will allow you to get back to what really matters faster: building your company.