Abstract from https://www.startups.co
According to Phil Nadel, The purpose of this article is to provide a review of the 11 most common reasons why startup.co platform (and other potential investors) choose not to invest in companies in hopes that some founders might find it helpful in improving their chances of raising capital.
- Lack of transparency/candor – If the founder is not forthright, the investor lose interest. Venture investing is based on relationships and being opaque makes for an inauspicious beginning of a relationship.
- Nothing proprietary/defensible – If a company doesn’t have something that is proprietary that makes it defensible against potential competitors, then its success will lead to its downfall. Without a moat, the company’s success is easily replicable.
- No proven, scalable paid marketing channels – If a company has not yet identified cost-efficient marketing channels that are scalable, then they are more likely to burn through external capital experimenting and testing to find them. It’s better invest in companies that have already done at least enough of this initial testing so that they can use our investment to scale the channels that are working.
- Don’t know your Key Performance Indicators (KPIs) – There is a direct correlation between the depth of a founder’s knowledge of the company’s KPIs and the company’s success. Founders must demonstrate that they understand which metrics are important to their business and they must demonstrate that they are properly measuring and calculating those metrics.
- Short runway – Founders must know the current cash burn and must have formulated detailed projections of how they will spend the funds they are raising and how much cash they will be burning each month post-close, in order to calculate post-close runway.
- TAM is too small – A company needs to be addressing a large enough market to make its upside revenue potential meaningful to an acquirer. If a company can’t demonstrate to us that the size of the market that its solutions address is reasonable, it’s not appetizing.
- Pre-revenue or pre-ship – It’s prudent to invest after a company has made a first sale and has shown some early evidence of product-market fit.
- No vision – Have a clear vision for how to grow the company to 100x its current size is a good pratice. While getting there will certainly require the company to deviate from this vision, not having a vision makes it infinitely more difficult.
- Don’t intimately understand your competition – Founders should thoroughly understand the solutions being offered by their competitors, what market segments they are addressing and how they are selling. A company’s potential customers will be comparing the company’s product against other available solutions and sharp founders will have properly positioned the product for success. Not being extremely knowledgeable about these other options and differentiating your product accordingly is a recipe for failure.
- Lopsided founding team – It’s better see a founding team with experience in a variety of disciplines, from engineering and development to sales and marketing. Having all disciplines baked in from the founding of a company helps ensure that it creates both great products and products that can be sold.
- No skin in the game – Founders must be 100% dedicated to the company: they need to be working full time on the business. Ideally, they have also invested a relatively significant amount of their own money in the company as well.
This list is an helpful checklist to make sure they are addressing some of the most common reasons why we (and probably other early-stage investors) pass on deals.
More details at – https://www.startups.co/articles/ by Phil Nadel