Reasons for which investors will say no to your startup
first they say no, and then they'll say yes.
Hey there,
Dragos here, from Project Arrow, where we mentor founders about how to build from 0 to 1 and get their startups investable in the process.
Pitching investors is always a difficult process, not matter your experience. Apart from being ghosted (i.e. never get a reply to your emails), which is quite common with investors, some of the biggest frustrations for founders comes from interpreting their feedback.
The negative answers from investors can be put in two buckets:
they didn’t get it
they did get it but your startup is not a fit for what they look for
If they didn’t get it, it’s most likely that you, as a founder looking for investors, did a poor job in building the deck and manufacturing your startup proposition. Over at Project Arrow we teach our founders a rule of thumb that goes along the lines “if your grandma can quickly understand what you do, so will investors”. It is the reason a pitch deck needs endless iterations and practices until it has sales potential for investors. It’s the core of our work at Project Arrow.
If investors did get it and still turned you down, there may be a lot of reasons - the good professional ones will usually provide feedback in order to justify their decision. Here’s a list of the most common ones:
The ask is not a fit to the investor
That is usually a stage fit - i.e. if you’re an early stage startup looking to raise seed (i.e. 1 million) and pitch an investor doing only series A (5 million or more).
The startup is not a fit to the investor
This can be related to your startup’s industry or business model. Examples:
if you’re doing an e-commerce startup and pitch an investor only backing in deep tech companies.
or your business model is B2B SAAS and try to get money from an investor only funding consumer-focused startups.
or you may be building a startup in Sweden and pitch a British investor that only does deals in the UK.
your startup is a direct competitor to startups within their portfolio
There is no evidence of demand for your startup
That simply means you don’t have traction on your KPI’s (key performance indicators). The KPIs are usually related to sales - they can be registered users, paying customers or anything demonstrating that there’s a fair number of people interested in your value proposition.
The growth speed is not enough.
You may have some traction for your business but don’t have enough data to prove that it’s consistent. That simply means your monthly growth rate should be higher than what you have - investors are usually ticked by double digit growth numbers on a 6-12 months basis for early stage startups.
TAM is not big enough
TAM is the total addressable market you’re after. Investors expect a minimum 10X return on their investment - if you ask for 1 million, they should get in return minimum 10 million. The market you’re in has to have a minimum size for providing them with the potential for that exit.
They can’t see the company making $100 million a year ARR
ARR stands for Annual Recurring Revenue - can you demonstrate a clear strategy of getting to sales of 100 million in 5 years? Is the the above TAM high enough? Do you have a great GTM (go to market) plan that can get you in that position?
You are not solving hard problems.
That means your startup doesn’t have enough differentiation compared to other startups in your industry. You need to show why your product or your business are unique.
It is a crowded space
It simple means that the perceived competition for your business is very high, and, as stated at the previous point, you’re not differentiated enough in order to compete with other players in the market.
Those are some of the most common reasons you will hear from investors not being interested in your startup. Keep in mind that everything is subjective, and if you think it doesn’t make sense it’s either because investors don’t get it or you were not well prepared.
It’s usually the second scenario - either way that means you’ve got homework to do and need to make sure that your startup is investable before you start contacting the investors. It’s what we do at Project Arrow - we make an initial evaluation of your chances to raise and then tell what you can improve to become fundable. Startup founders get mentorship and progress guidance that can ultimately save a lot of time, efforts and money.
What do you make of it? Does it make sense to you? Hit reply and let me know.
Until next week,
Dragos
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