Reasons why investors say no to your startup

Pitching investors is a difficult process. It can be almost a full-time job for a startup founder for several months, and mentally one has to get used to constant rejections (or being ghosted).

Investors receive hundreds, if not thousands, of funding requests from startups annually, and will only end up investing in a handful (perhaps 5-10, depending on the stage) every year. They are always looking for a reason to say no, and VC’s look for micro-signals to eliminate founders.

To stand out, you’ll need a compelling pitch deck (which we’ll cover in a separate post), with a clear proposition so simple that even your grandma could quickly understand what you do.

Even with a strong pitch deck, investors are likely to pass on investing. It’s not personal — they just often have better options than what you’re selling. But doing your homework might help you avoid some common reasons why investors say no.

Your ask is not a fit to the investor

This is often a stage mismatch — e.g. you’re looking to raise a $300K pre-seed round but the investor only invests from Series A onwards (with $5M typical tickets). Check the investor’s investment thesis (often listed on the website) before you pitch them.

Your valuation is beyond the investor’s range

An early-stage investor may have a target of investing $1M tickets in exchange for 10% of a startup. If your valuation is too high, the investor doesn’t get to its ownership goal, and so they’re out.

Your startup is in the wrong vertical or has the wrong business model for the investor’s thesis

This can be related to your startups industry or business model. For example:

• You have an AgTech startup and pitch a VC who only invests in CPG/FMCG food brands.

• Your business model is B2B SaaS, and try to get funding from an investor who only funds B2C startups.

• You’re building a startup in Denmark but pitch an Paris-based investor that only invests in France.

• Your startup is a direct, or close enough, competitor to an startup that the investor has already invested in.

Your impact potential is too small or non-existent

Impact investors typically have set clear impact goals, mandating them to only invest in companies that have a potential of reaching certain environmental or social goals. This means that they for example may want to see a model for how a startup can save 100,000 tons of CO2e (carbon dioxide equivalents) per annum.

If your startup can’t credibly show how it will meet certain impact goals, the investor will pass.

You can’t provide evidence of demand for what your startup does

Investors will look at what traction you have on your KPIs (key performance indicators), that are usually related to sales, gross margins, and the path to profitability. Here’s a quick and dirty hierarchy:

Actual revenue / ARR (annualized recurring revenue) —>
Contracted ARR —>
Paid proof of concepts —>
Unpaid trials —>
LOIs —>
Pipeline value

Focus the VC’s attention as far up this hierarchy as you possibly and credibly can. If you can’t show that people / customers are interested in your value propositions, investors will not be convinced.

Your traction is too slow

Maybe you have some growth, but it’s too slow — or you don’t have enough data to prove that the growth is consistent. If you have single-digit monthly growth rate (say 3-5%), investors will not be as excited as if you have double-digit (10%+) growth numbers each month for the past 6-12 months, for early-stage startups.

Your TAM is too small

TAM is the Total Addressable Market you’re going after. It’s a top-down way to size your market (I actually prefer a bottom-up market-sizing, but that’s for another post). Let’s say the VC has raised a $50M fund that they want to 3x (i.e. grow to $150M) over the course of ten years, so they invest a total of $20M via $1M tickets for 10% ownership into 20 companies (the remainder, $30M, is for fund fees and follow-on investments). This means they need each of these 20 investments to potentially be able to ‘return the fund’ — meaning the 10% ownership need to be worth $150M as the startup has a exit (through an IPO or M&A). The market in this case has to be big enough to provide for a $1.5B exit!

Therefore, VCs are typically less interested in markets worth less than $1B.

Your path to $100M ARR isn’t credible

ARR stands for Annual Recurring Revenue. Many early-stage VCs want to see a clear path for a startup to get to $100M in ARR within 5-7 years. Is the TAM big enough for this? Is the GTM (go-to-market) plan for getting your startup to $100M in ARR credible?

Your startup is entering a crowded space

If investors perceive that the competition for your business is very high and you’re not differentiated enough, they will be hesistant to invest.

You don’t instill confidence

In early-stage investing (e.g. pre-seed), typically there are very few numbers available to help an investor assess the viability of a startup. Therefore, the investor will look for trustworthy founders, capable of building a strong, growing company. A team of serial entrepreneurs with complementary skillsets typically will appear more credible than a solo, first-time founder.

Investors generally will not tell a founder that they don’t have confidence in him/her, so instead they’ll state something else (many examples above) as reason for not investing.

If you feel the investor gave you a BS reason for not investing, the real reason may unfortunately be that the investor just doesn’t have faith in…you 🤷