Whether you are raising money to grow your business from an angel investor or going for a larger Series A round, there are some fundamentals that all investors look for before considering an investment. So, before you waste your own time (and discredit yourself in front of investors), spend some time looking at your business from their perspective.
Easy said that done, right? We are love the businesses we create! We wouldn’t have created them in the first place if we weren’t passionate about what we are doing. (NOTE: If you do not LOVE your business, and I mean adoration here, then stop reading this right now and start looking for a job.) If you are still reading, I applaud you!
Now, how are you going to really look at your baby to see she’s as beautiful as you think, or if you have been wearing rose tinted glasses?
How to start
For this exercise, rename your company to something really cheesy. For example, Uber might be ‘DIY-Taxi’, Slack might be ‘Team-Chat’. Also, the names of the key team members should be changed too. By doing this, you immediately disassociate and remove the any emotional connection to your business and team. You’ll notice it’s easier to poke fun at your ‘new’ business without getting defensive and hopefully reveal whatever had been wrongly determined before. Have fun with it!
Now that you have removed the emotion from the business, here are 4 reasons why an investor would not invest in your business. Use them to scrutinize your approach to investors and check if you will pass their barriers. If you can eliminate every one of the points below, you will have a very strong chance to raise the money you need.
Related Post: 7 Key Principles To Master The Art Of Pitch Decks
Reason 1 – There is something wrong with the Team
9 times out of 10, the team is the most important part of your business in an investors eyes. A great team can take the punches, adapt to the environment and do whatever it takes to succeed. Here are the main weaknesses an investor will spot and be turned off by.
• Lack of leadership
• Lack of Integrity
• No domain experience
• Clashing personalities within the team
• Lack of vision or direction
• No clue how to scale the business
• CEO isn’t coachable
• No relationship with the investor or their direct connections
• Founders lack focus
• Founders don’t have a deep passion for the product
• There is no understanding the user funnel/economics
• Oblivious to how much work it will actually take to build the business
Reason 2 – There is something wrong with the Product
Next is product. You must have created something that people will desperately want, something unique and have the potential to make a lot of money. Investors will poke at your product to see if they can reveal any of the following disadvantages.
• It’s not unique
• It’s not solving a significant pain point
• No customer validation
• Limited or lack of monetization potential
• No clear differentiation
• Lack of solid metrics
• No ability to scale
• It’s not a sticky product
• It’s not easy to talk about
• The product is trying to do to many things and have no clear focus point
• No momentum
Reason 3: There is something wrong with the Market
With the team assessed and the product examined, next is examining the market you are in and what the potential is in that space. With the market in mind, here are the main reasons an investor will turn you down. You must eliminate all of these!
• The market opportunity is too small
• No way for the company to get up to $100 Million in revenue
• Market place is too risky
• Too many barriers
• Too many well-funded direct competitors
• You are aiming for 50% of a $200 million market and not 10% of a $1 billion market
• No distinct competitive advantage
• Too easy for competitors to copy you
• No idea where there return of investment will come from
• The maximum return on investment makes it not worth our while
Reason 4: There is something wrong with the Investor
Most investors tend to specialize on particular markets where they have experience and deep knowledge. It helps de-risk by sticking to investing in what they know. Their readiness to invest is also dictated by the stage of their fund. Do your research first to ensure your potential investor can’t say any of the following to you.
• The amount is outside of our range
• You are too early stage for our fund
• You are too late stage for our fund
• We typically lead the round and you already have a lead investor
• We typically co-invest, come back when you have a lead investor
• We don’t invest in that market space
• We don’t have enough experience to make a good call
• We have already invested in a company doing something similar to you
• We have lost money in that area before
The team at 500 Designs have built businesses and raised capital, so we know what you are going through. Just think about it this way, it’s all about reducing the perceived risk for the investor.
If you can crush any potential objections, not only will you find it easier to raise investment, you’ll also have a rock solid business that is far more likely to succeed. If there is something we can do to help, get in touch.
by Vivienne Piong and Stephen Brett