According to the Small Business Administration, more than 600,000 new businesses are started by entrepreneurs each year.
Only about 1500 are funded by venture capitalists.
What’s this mean for you? It means that your odds are incredibly slim if you want to finance your startup with venture capital.
It also means that if you do want financing, you’re going to have to work hard to convince a venture capitalist to fund you.
To help you have the best shot at funding, we look at what gets you rejected by VCs.
You Don’t Have a Business Plan
Don’t even bother approaching a venture capitalist without a well thought out and well-crafted business plan.
If you want to start your conversation out right, present your potential investor with a professional business plan. Here are some things to include:
- Executive summary that hooks the venture capitalist. Keep this to two-four pages and use it to entice the VC into reading the rest of your plan.
- Company Analysis that educates the investor on your company and says why it’s perfect. Include all of your company history as well as your legal structure and development stage. Be sure to include your track record to date and any experience you have launching companies.
- Industry Analysis is the place to show there’s a market for your product or service. This is where you demonstrate need. Use credible sources and research about your target market. Every figure and projection in your report should support why your product/service will succeed in the marketplace.
- Customer analysis shows you understand the needs of your customers and how to meet them. Define your customers down to demographics and buyer personas.
- Include a competitive analysis that demonstrates how you are better than the competition and can overtake them. List all of your competitors, direct and indirect. Describe their strengths and weaknesses in relation to yours.
- Write a marketing plan that shows how you’ll enter and penetrate the market and attract and retain customers.
- Include an operations plan that details how you’ll hire and train staff. Use this section to describe your goals and how you’ll measure them.
- Lay out your financial plan and explain how you’ll generate returns for your investors. Show exactly how you’ll spend their money.
Raising money from venture capitalists depends on your business plan.
This document has one goal, and that’s to sell investors on your startup. You’ll greatly improve your chances at acceptance with a business plan that speaks to the investor and looks at all angles from his perspective.
You Aren’t Far Enough Along
Venture capitalists often reject startups because they are too new, and they aren’t far enough along.
This is often a serious red flag for investors.
If you are in the idea state of your startup, you can bet you won’t find many venture capitalists wanting to fund you.
VCs usually invest when they have a good idea of what state a startup is in. If you’re in the idea stage, you might be rejected and told to come back later when you’ve got some traction in the market.
So, before you seek venture capital, you should be well past the idea stage of your startup and well into the implementation stage.
You’ll find that early-stage investors want to see strong market opportunity before writing you a check.
You can do this by launching a pilot program or beta product.
What VCs want to see is your ability to convert paying customers. This market traction is crucial as it shows VCs you have the ability to grow past your early adopters.
You Don’t Have a Compelling Value Proposition
To avoid rejection, you must be able to demonstrate how your business is different and better than the competition.
If you don’t have a compelling value proposition, seeking capital is basically useless.
Ask yourself if a potential customer would wait in line for your product. Would they find it valuable enough to stick around? If the answer is no, your value isn’t strong enough.
You also want to look at scalability. If your business can’t grow, it again isn’t worth the VC’s while.
These are three of the things that get you rejected by VCs.
Study these reasons, and turn our suggestions into action. Know your company, create a business plan that includes marketing strategy, and you’ll have a better shot when seeking investment from venture capitalists.
Know what investors want and give it to them upfront.
If you get rejected the first time, that doesn’t mean all is lost. Fix the things that bothered them and present your plan again.
Are you a new startup ready to succeed? Are you looking to get your new business off the ground and watch it rise to success? We are here for you. We can help answer your questions and guide you through the process. Outsource your HR duties, finances, payroll and more to us. Contact Escalon today to get started.
Image: Olu Eletu