There’s no doubt that startup funding is a tough game. Figuring out the right way to fund your startup isn’t easy. It’s especially tough for founders looking for seed funding to launch. Seed funding is often used to validate a business model, get to proof of concept stage, or get the startup off the ground until it can start generating cash flow or make it to the next round of investment. Founders who are successful in securing startup funding pass an important milestone in market validation. In many cases, startup funding most often comes from friends and family, crowdfunding or angel investors.
Unfortunately, winning seed capital for startup funding is unpredictable, stressful and challenging. Worse yet, there is no single formula on how to win over investors. For most founders, there typically isn’t an investor waiting in the sidelines poised and ready to hand you a wad of cash simply because your business idea seems compelling. Figuring this process out is an integral part of a startup’s journey to fruition. It’s an essential part of being a business owner.
I have secured well over $200 million in funding and have led and been part of decision-making processes that have awarded more than $1 billion. Thanks to these experiences, I understand how funders make their decisions. In reviewing pitches and proposals, these are some of the most common reasons startups aren’t successful when seeking startup funding.
- Not clearly defining the “problem” you’re solving in the marketplace: At the drop of a hat, entrepreneurs must be able to clearly and concisely explain their startup to prospective investors. Great business ideas often don’t’ get funded because of the entrepreneur’s clumsiness communicating the most basic points of the business in a presentation. And of all points, tackling a problem worth solving is the most critical. Before parting with their cash, investors need to know that your startup addresses a problem that enough people will pay to solve and in the process, make the business successful. Failing to clearly and concisely define a problem worth solving is one of the most common errors founders make when pitching for funding.
- A lack of understanding the needs of your target market: It’s impossible to please everyone all the time. This is especially true in the startup world– a business will not find success if it’s not clear on who it aims to serve. Investors are keenly aware of this fact. If the business idea truly does solve a clear problem within the marketplace, then the target market for the product or service must be made clear. More important, the founder must demonstrate a clear understanding of the needs of the target market. Failing to demonstrate this understanding inevitably leads to the next item on the list.
- Poorly-defined pathway to customer acquisition: Investors are not interested in funding a startup that does not have a clear path to customer acquisition. A poorly-defined pathway to customer acquisition is often the result of a failure to clearly identify a target market and understanding of customer needs. A clear and comprehensive customer acquisition plan should include various trajectories, specific targets and performance metrics for measuring progress.
- Not considering risks and obstacles: Growing a business is exciting! So, it’s understandable that hopeful business owners will want to immediately hit the ground running. However, a proper risk assessment map is key. We all know that in life, things often don’t go as planned. Investors know this and are not likely to fund a startup that has not carefully considered all the potential risks and obstacles it will face on its pathway to launch. A feasibility study or business model validation analysis conducted by a third party are two strategies founders use to demonstrate that they have considered the risks and obstacles. Even if you are not able to pay for a third-party analysis, at the very least, you must explore all the risks, obstacles and challenges your startup will face. More important, you must clearly outline the strategies you will use to overcome those risks or obstacles. it may be disappointing to learn of some non-viable elements of your business plan, but a good assessment will steer business owners away from off-target decisions.
- Unclear and inaccurate financial assumptions: It should almost go without saying — accurate and detailed financial projections are essential. It is true that a startup’s financial projections are only hypothetical, but it is critical that the underlying assumptions behind the numbers are rational and clearly laid out. It is important to be conscientious at this step. Inexperienced founders often fail to adequately explain the key assumptions supporting their financial projections.
Avoiding these mistakes
If you are a founder in search of startup capital, it is critical to consider these five points when preparing your pitch. But addressing these points is not necessarily easy. There’s a reason that these are some of the most common omissions that prevent startups from getting funded—they’re not easy points to address. If it were easy, I wouldn’t be writing this article.
Addressing each of these points requires time, effort and an ability to take a hard look at your startup business model. As you work through these points, you may uncover information that is disappointing or causes you to reexamine your business model. In any case, it’s a worthwhile process. When looking to secure startup funding, it’s a good idea to review funding sites such as Angel List and Gust.
Of course, there is still no guarantee that once these items are checked off your list, investments will come flowing in. This is simply the nature of the startup world. But if you do successfully address each of these five points, you will be in a much stronger position to get the startup funding you need to launch and grow.