There’s this guy. He left his seven-figure salary job to pursue a startup. Has spent last three years trying to build it. He approaches venture capitalists (VCs) and angels every quarter but gets rejected every single time. He is running out of the loan he took from friends and family. Should he call it quits now? Should he still try to run it?
There could be five possible reasons why you are not getting funded in spite of your best efforts.
- You suck
- Your startup sucks
- VCs suck
- Market sucks
- Your luck sucks
Let’s go through them one by one, and see what can be done about each of them.
Possible reasons that “you” might be the reason your startup is not getting funded:
- You are inexperienced
Here are some solutions:
- Get domain experience by working as an employee at a startup in a similar space
- Get a degree in the field you want to start your company in
- Keep on working on your current startup for years, until you become an expert
- You didn’t go to IITs/IIMs
Even though a good pedigree does give you several advantages in terms of exposure and network, there is no real reason why your non-Ivy League startup cannot succeed. There are tons of examples of funded startups, which are not run by IIT or IIM grads. This can’t really be the only reason your startup is not getting funded. Find out what other reasons might be holding you down.
- You started up for the wrong reasons
- Were you compelled by a particular personal pain point?
- Did you start a company to become rich or just because you hate your job?
This video talks more about the “why” of starting up.
If you feel that you started a startup for the wrong reasons, shut it down now. There is no point in wasting so many of your crucial years doing something you are not meant to do.
- You are bad at communicating your story
- Get a clarity on why you started this company and why you are the best person to do it.
- What is the vision that drives your company forward. Don’t just use jargon. Mean it.
- Practice a lot.
Your startup sucks
Here are some possible reasons for that:
- Your startup is not really a startup. It is just an idea/b-plan: It’s very easy for investors to figure out if you have done any real work or not. Get at least a proof of concept (and your LaunchRock landing page doesn’t count).
- You are not solving a true pain point: There is not much that can be done about it. Only solution is try another venture, which actually does solve a real problem.
- Team is incomplete: Are you building a pure-play tech product and have outsourced the product development? For some businesses, it’s okay to not have a CTO to begin with, but for some it is essential to have in-house tech expertise from day one. Another version of incomplete team is, if the founders have met just for the sake of startup at a conference/event and don’t really have a mutual history. The chances of founder’s dispute increases in such startups, and VCs might take that as a negative factor. Figure out if you have a complete team. If not, get one first.
- Team is not full-time: Are you still working on your daytime job and are waiting for VC money to kick in before you call it quits? How do you expect VCs to have confidence in your idea, when you yourself don’t have the faith in your capability to execute it?
- You are doing things that don’t ever scale: It is okay to follow Paul Graham’s advice, but also remember that you will eventually need to scale, and for that you need to be present in a market that allows for that scale.
- You are asset-heavy: This doesn’t necessarily mean that your startup is non-fundable. However, VCs normally tend to hate asset-heavy models. This might be one of the reasons VCs keep saying no to you. If you still believe that asset-heavy is the correct model for the venture, go ahead with it. Create value for your customers. VCs will eventually follow. On the other hand, if you also have doubts, try an asset-light model.
- Your traction is low and steady: Figure out a model that gives you a true product-market fit. Until then, keep on experimenting.
- You are trying to do everything for everybody: You can do anything, but not everything. Focus on one use case and a clear strategy to nail that one, and then go ahead with other use cases or geographies.
These might be scenarios where VCs fail to see value in your startup. Don’t always be disheartened. There might be a healthy chance that they see value in your startup after you have proven it out.
- Opportunistic VC: VCs generally do tend to be opportunistic in the kind of investments they make. They might be willing to put in money in proven models, which have worked in US or China, but will refuse to fund your truly innovative idea.
- Mismatch between your company and the VC’s expectations: In VC firms, top 2% of the companies generate 98% of the wealth. So VCs are looking for opportunities that generate 10x or 20x returns. Yours might be a good business to run, but might have the capability to return just 3x or 4x. That’s not necessarily bad, it just means that VC money might not be the smartest money for you.
The key here is to believe in yourself and your company. There is nothing much you can do if VCs fail to see value in your futuristic product. Timing is a critical factor in the success of your company. Just keep on exectuing, and eventually VCs will come chasing you.
After all, you don’t need the whole VC world to put money in you, you need the very few ones who truly share your vision.
The market sucks
This can be interpreted in multiple aspects:
- Slow market: Fund raising for startups has generally become difficult because of slowing down of the market. If this is the case, there is literally nothing you can do, apart from cutting your burn, and hoping to let the cycle pass.
- Difficult sector: Raising funds in the sector you operate in might be hard. Be it long sales cycles, wafer thin margins or high customisation, all contribute to the sector being very difficult to operate in. For example, if you are an inexperienced education startup who sells to schools, VCs normally would say no. Being in a difficult sector dramatically hampers your chances of getting funded. VCs generally fund opportunities that exist in large markets that have the potential to return huge multiples.
- Crowded market: Your startup’s sector is already crowded with multiple funded players and VCs don’t see a clear differentiator between you and them.
Your luck sucks
If you think all of the above do not apply to you and it’s just that your luck is bad, then keep on trying and make your own luck. A few ways to make your own luck:
- Be social: The number of “lucky breaks” one gets is a factor of how social and interconnected they were with those around them.
- Do stupid stuff: Experiment a lot. Perception of luck is more likely to fall on those who take a few dumb risks.
- Maximise return on luck: What sets the successful companies apart from the others is that they maximise their positive luck and minimise their negative luck. They get, what author Mark Manson calls, high return on luck.