Most startup companies have the same goal: get funded by a prestigious VC who can help them scale, offer valuable connections and send a signal that the company is a comer. But we all know that VCs, especially the big ones, pass on over 99 percent of the deals they see. So what's the secret to getting funded?
I have invested in startups for the past 15 years and over that time I’ve seen thousands of company decks and have personally been pitched by hundreds of startups. Luckily, a number of deals I have funded have gone on to raise big rounds from famous VCs. While there is no universal answer as to how a startup successfully closes a great funding round, below are seven issues that I’ve noticed always kill VC interest:
1. Not solving a real problem
Everyone thinks his or her startup solves a consumer pain point. However, ask yourself metaphorically if the pain point you solve is “aspirin level” or is it “morphine level?” Big VCs love to invest in businesses that solve morphine-level pain. Why? Because when pain is huge, it’s far likelier consumers will pay for the solution. Businesses that solve minor inconveniences usually hit a brick wall when they try and monetize or scale and don't usually get funded.
2. Targeting tiny markets
Given the huge risks in startup investing, I need to see that your startup can become a billion-dollar business. Yes, that’s billion with a capital B. If your target addressable market is in the nine digits, most big VCs will dismiss it as too small. A $100M exit, even though it sounds amazing, usually will not move the needle for a large fund that has billions to deploy. Big markets mean big dollars, so think BIG.
3. No technical talent
I see deck after deck proposing all types of mobile apps but many times the companies have no personnel who can actually program or code. This destroys credibility. Outsourcing or using technical consultants will not cut it. If you don’t have a technical co-founder you’ve pretty much selected yourselves for extinction. Do not try and raise money until you can credibly point to the person who is going to make the backend or technical magic happen.
4. Underestimating your competition
When I see that there are over four existing players in your space, or if you have chosen to compete with existing tech monsters (Facebook, Google, etc.), you better have a bulletproof story about why your business is different. Compelling business models usually have very little real competition, because they are attacking the market creatively and doing something that hasn’t been done before. It can be much harder to get funded as a “me-too” business.
5. Overestimating your product
In Peter Thiel’s book Zero To One, he says that your product needs to be 10X better than whatever is currently out there to get breakaway traction. I agree. Anything less than 10X will not create consumer passion that is sticky and viral. As a CEO of a technology company myself, I know that making something even 50 percent better is hard, so 10 times may sound crazy. But in our hyper-competitive economy, you need to come to market with something that is not only incrementally better if you want to get funded.
6. Relying on top-down analysis
All too often, I hear a pitch that says something like “our target market is X billion in size, and if we can get Y percent of it, we will be Z billion in revenue.” Nobody ever believes this top-down fluff, so just avoid it. You have to have a bottom-up analysis that starts with the unit economics of your product and shows how you will get to the first million in sales. That first million will be the hardest revenue you ever get, so if you can convince me that you will beat the odds and get there, it makes it far easier to believe your scaling story.
7. Lack of passion
This may be the most important. Remember, in the end VCs are investing in people. No matter how much I like your product, if the CEO and team do not exude passion and confidence, I pass every time. As someone who has founded and built businesses, I know every startup will face “going concern” risk at some point over the first year or two. Sometimes the only thing that keeps you going is passion and confidence. So make sure you believe your own story and that you really love your product, because everyone in the room can tell instantly.
If you avoid the pitfalls listed above, you will have a far greater chance of raising a round with a great VC. Good luck!