Posted on
September 11, 2020
min read

8 Reasons Why an Investor Won't Make an Investment in Your Startup

Julian Droste
Julian Droste
Founder, Digital Marketer & SEO
Author Twitter

Contrary to what Shark Tank may make us believe, finding investors to fund a new startup is no easy task.
While entrepreneurs are known to make risky business decisions, no investor wants to put money into a company with a red-flag-laden pitch deck.

So, to save you some time, we've compiled a list of common startup mistakes leaders make when pitching to investors.

First, let's talk about how to find value in rejection.

Understand the Value of a Rejection

Investors are busy, and they may see a thousand companies or more a year. They have a lot of experience evaluating startup businesses. However, their goal isn't to reject you. 
They're searching for reasons to invest. When they decide not to move forward with an investment, there is a meaning behind this decision.

The secret to gaining investment is not persistence. Instead, it's acquiring and collecting feedback from each rejection that will help you succeed in the future. 

Don't write off rejection as something to be overcome through pushing through the same pitch deck with a new potential investor. You must learn to listen and adequately interpret rejections. After each failed pitch, remember to ask yourself why the investor wasn't interested in investing in your business. 

Interpreting Your Rejections

In most cases, investor rejections occur as a result of one of several potential reasons. Understanding these common startup mistakes will help you improve your pitch and startup moving forward.

1. It's Too Early

A substantial amount of investor rejections stem from issues with a company requesting investments too early. An excellent example of this is when startups approach a venture capitalist with only a few early customers and a functional prototype.

Institutional investors typically won't get involved in the seed stage, but this doesn't stop excited founders. The latter are in love with their business ideas from pitching venture capitalists before they're ready for institutional money.

While it's good for early startups to build relationships with venture capitalists and gain experience pitching, the pitch always ends in rejection. If you're a founder who's business is rejected for this reason, understand that VCs will talk with you to get to know potential investments as early as possible. But continuing to pitch to investors who only invest at later stages isn't going to change their minds.

Instead, use meetings with VCs to understand which milestones you need to hit before you return to try again.

2. You Don't Understand Your Niche

Investors get nervous when they realize that you haven't correctly identified your niche. The utmost priority is your customers. You must understand what they want. Most people are looking for products that are high-quality, unique, and are of interest to them.

If you don't identify a niche, potential investors will see your startup as a potential flop because you don't recognize what your consumers need.

3. You're Approaching Investors Incorrectly

Every decision to approach an investor should be a calculated one. One of the greatest mistakes you can make is cold calling an investor. Angel investors, institutional investors, and banks receive numerous proposals and several business opportunities. They simply won't respond to requests from people they don't know. 

However, you may have better luck sending your proposal through a strong recommendation from their network. 

Also, it's essential to know that an investor will not choose to fund a startup that is out of their area of expertise. Like doctors, investors have a specialty. If you're launching a new men's clothing product, you don't pitch to an investor in the manufacturing industry.

Always dedicate time to performing thorough research before approaching potential investors. 

And once you get in the door, don't make the mistake of requesting more than you need when entering a new industry. You must show your expertise and farsightedness, or you will demonstrate a lack of knowledge of your industry.

4. They Have Concerns About You or Your Team

When an investor expresses concerns over a team, they're usually referring to one of three areas. 

The first is a team that is missing key players necessary for capturing a specific market opportunity. For example, a team developing an e-commerce software product that doesn't have an e-commerce expert or software engineer on the founding team. This is a red flag for investors. 

The second issue is inexperience. Sometimes it is clear that founders are too new in their roles and need more experience before they're ready to take on a fast-growing startup. 

While time and experience is the best solution, it's not the only answer. Even the best business people make mistakes—regardless of experience level. If you're able to demonstrate that you're teachable, investors might consider taking a risk. 

The third and most problematic issue is when a founding team doesn't know how to work together. Conflict is an issue most investors will stay far away from. A founding team that can't get along can never build a successful business. 

5. You Don't Have a Business Plan

A crucial part of your pitch should be discussing where your startup will be in a couple of years, besides reassuring them that you're a passionate, committed person. 

The absence of a business plan shows a lack of preparedness, which will disadvantage you. However, having a business plan does not guarantee that an investor will be interested in your idea or products. 

Imagine the number of opportunities an investor has each year. You must ensure that your plan is perfect and can withstand the competition. It's not as simple as indicating that there is an interest in your product. You must know where you expect to take your business in the future.

If an investor isn't impressed with your business model, they won't invest in your idea or business. 

6. Your Idea Is Not Unique

If you will seek funding for your startup in the future, your idea or product must be new. Investors seek companies who have completely new ideas or have come up with unique solutions to solve problems. 
You must have an idea or product that is different or unique beyond what your competition has. Perhaps create an entirely new solution from an old business model. 

7. They Don't Trust Your Idea

Building on the need for a unique idea, you must have an idea that investors will believe in and trust. 

To develop a successful startup, you need to perform thorough market research and see what your niche customers require. Based on your findings, you should create a business idea that's beneficial to you and your audience alike. 

Sometimes incredibly unique ideas turn off investors because they seem too risky. This is why it's essential to prove that your idea is well thought out and sustainable before you pitch it to anyone. 

Investors tend to invest in people as well as their businesses. If they love your product and don't trust you as a person, they'll back out of investing in your company. They will not waste time on leaders they view as having flawed character, judgment, or leadership skills. 

8. Portfolio Overlap

Investors won't fund competitive companies unless they're a startup accelerator with hundreds of portfolio companies. If they did, they'd put themselves in a position where one company wins a market at the expense of the other. 

While investors may not invest in competitive companies, they're usually willing to talk with competitive companies. These are opportunities to learn about the possible competition in a way that may improve their portfolios.

While VCs won't actively seek out these conversations, sometimes they'll realize that a company they're meeting with is competitive to one in their portfolio. A respectable VC will disclose the overlap, but it may not be evident to them immediately. 

Always do your due diligence before a pitch. If you ever schedule a meeting with an investor who funds one of your competitors, this is your fault. 

Learn From These Startup Mistakes

If you're a startup owner—or are just getting started with a new business idea—we hope you now understand the value of learning from these startup mistakes.

Taking these points into consideration will be helpful before your next pitch to potential investors.

Before you bootstrap your business and seek pre-seed or seed funding, it's essential to prepare. Attracting funding isn't as simple as asking people for money. Your pitch must be investor-ready. 

We're here to help startups like yours raise more in venture money. That's why we have designed pitch deck and presentation templates ready to help you convey all of the necessary information. Every slide is designed with purpose and is fully editable with PowerPoint, Keynote, and Google Slides.

If you're still perfecting your pitch, click here to download our pitch deck template today!

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Julian Droste
Julian Droste
Founder, Digital Marketer & SEO
Author Twitter LinkAuthor LinkedIN

Writer, content producer and SEO Julian Droste is the author and father of our entrepreneur-helping blog and website. Since the beginning of 2015, Julian has created over 400+ articles about a wide range of topics e.g., math, biology, chemistry, history, engineering, and many more.

His passion for entrepreneurship, presentations, and speeches led him to basetemplates where he can share his experience in building a startup with future entrepreneurs.

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