In the last story, I answered the most common question I’m asked by founders: “How do I raise capital for a startup without any revenue or customers?”. In this post, let’s tackle another perennial favourite, “why won’t they invest in my startup?” The first reason is usually expressed upfront, the next three are sometimes the secret underlying reasons why they don’t proceed.
It doesn’t match their portfolio
It may not meet a VC fund’s investment hypothesis if they’re a VC, or doesn’t meet their current interests if they’re an angel. If someone got burned by a previous investment in hospitality and has decided not to do hospitality startups anymore, there’s nothing you can do to undo that trauma and talk them around if you’re a hospitality startup. If they focus on patentable IP coming out of university research, and you don’t have that, it doesn’t matter how good your deal is — a fund is accountable to its investors and must stick to their investment hypothesis.
They don’t have to right now
If you’re in Australia and raising in Australia, the primary reason they won’t invest is because they don’t have to right now. There’s insufficient competition between investors in early-stage tech in Australia. If the investor is known in the ecosystem they can be reasonably confident they’ll see all the deals in the market, and will have all the time in the world to make a decision about them. So they can play “the long no” and keep asking to meet again in another month, and see how you go with customer and revenue traction. Each month they delay is another month for you to reduce the risk of their investment for them — who wouldn’t want that, in their position? The only way to fix this is to go bring more competition to the table from other investors.
They don’t see anything like this in the US
Most Australian investors like backing something which is like something which is going bananas in the US. So if your startup was similar to a huge, fast-growing SF startup, they’d love that. It’s irrational, because it’s likely that the big US competitor will wipe you out when they eventually come to Australia. But they feel like it reduces their risk. Irrational feels are hard to combat but you may need to prove that you can go global and begin/increase your growth in other major markets to fix this.
There are other deals they like better
The final reason is that they have more attractive deals on the table right now. Most investors have only so much capital to invest in a given time period, and they might like you a lot, but they want to invest in something else because it seems like a better deal because of any combination of the terms, the valuation, the traction to date, the team’s track record, the patentable IP, the other investors already committed, etc.
Think of a venture fund as a different kind of conversion funnel. To write a target number of cheques each year, the venture fund needs a larger number than that to make it through due diligence, a larger number than that to pass muster with the active partners, a larger number than that to qualify for an investment committee meeting, a larger number than that to qualify for a coffee meeting, and a larger number than that to fit the focus of the fund.
At any point in that conversion funnel, you and your capital raise might be ejected, but even at that very last stage, when due diligence is complete and the partners like you, the fund can have five do-able deals on the table but only need to write cheques to three of them. Somebody may have to have their torch snuffed out and be sent home.
You can’t prevent yourself being ejected from the tribal council, but if you work hard on the partners you might be able to stay on Survivor Island (by which I mean: work on making sure that you’re still up for consideration at the next investment committee meeting. Work those venture partner relationships. Try to minimise the number of steps backwards through the conversion funnel they push you. Focus on the positive “this is a deal you want to do!” not the negative “why did I get passed on?”.