Although new entrepreneurs most often look towards venture capital (VC) and angel investors (angels) as their primary source of investment, few new ventures actually get funded through either of these sources. In fact, on average, VCs actually fund less than 1 percent of all the proposals they see and angels only fund from 4 to 8 percent of the proposals submitted to them.
There are a number of reasons that so few pitches actually get funded through angels or VCs. First, depending on their size, an angel, angel group or VC might receive anywhere from several hundred to several thousand funding pitches a year. The extraordinarily high number of proposals received each year means that competition for funding is fierce—only the best of the best will make the cut and get funded. Second—and most important—many pitches don’t get funded because once the funder conducts a deeper analysis of the business model, things start to fall apart.
Many entrepreneurs get stuck on the idea that securing funding is all about building the perfect pitch deck. And the fact is, there are plenty of great marketers or content developers who can craft a catchy pitch deck or proposal that gets noticed. But getting funding from an angel or VC takes more than getting noticed—it’s a start, but that’s all. Before making a decision to fund a startup venture, VCs, angels and other types of funders or investors undertake an extensive evaluative process to determine the degree to which a venture should get funded—if at all. This evaluation process is how a great many potentially great startup ventures get cast aside.
This is a process I know well. I am frequently called upon by both private and public sector funders to assist them in determining which companies, organizations and projects are worthy of funding investment. In that capacity, I have either led or been part of, the decision-making teams that have awarded more than $1 billion in funding over the last five years. Through this process, we analyze every aspect of a pitch—team, market potential, go-to-market strategy and every other component of the business model. In my experience, only a very few are able to stand up to scrutiny.
With this in mind, the question is this—how does a startup or early-stage venture ensure that its business model is able to withstand the intensive scrutiny of an outside investor or funder? The simple solution is to pre-analyze every facet of your business model before you pitch to investors or funders. Hence, while it may be tempting to hit the ground running and get things going, it is imperative that you slow down and turn the lens inward before starting up.
So how do you get a VC’s attention with your business plan? Make sure it starts with a letter that reads “This business plan has been independently verified by a Business Model Validation Analysis.”