By Mark MacLeod, a Partner at Real Ventures (Canada’s largest seed VC fund) and an advisor to some of Canada’s leading startups.
You don’t have to look too far to find entrepreneurs that have had a tough time raising VC$. Despite the endless stream of funding announcements these days, most companies that want to raise VC, don’t. This is due to a variety of reasons, but one of the biggest, is that venture capital is a very specific thing. It’s not what all technology businesses should think of when they need capital.
It only really works for businesses with:
– High potential for escape velocity
– A large potential market
– A team capable of building a large company
Sounds easy, but most opportunities don’t hit those criteria. This is why most VCs fund around 1% of the deals that they see. So, that means most people are not getting funded.
To help you judge whether VC is right for you, here are my completely subjective top 10 reasons why a business would not be VC fundable:
Services, not product: While some great startups were services companies before becoming product companies, you cannot (usually) raise $ for a services business. Why? Hard to scale without adding lots of bodies. VCs look for highly scalable products.
You are a sole founder: VCs much prefer investing in co-founders vs. solo founders. If you don’t have a co-founder it will be tougher to raise $. And more importantly, it will be tougher to build your company.
You don’t know any VCs: VCs get so many deals shown to them that they rely on a variety of filters to screen them out. One of the biggest is the source of the deal. If you are submitting your business plan to email@example.com, you’re wasting your time. You need to either know the VCs your’re pitching or have a very trusted referral into them.
You have no traction: This is a biggy. So many people come in and pitch VCs when they are just starting out. And while there are many funds that do seed, including ours, even seed VCs have a strong preference for investing in startups with some market validation and users already. Nothing gets VCs to move faster than traction.
You have outsourced development: This is a complete killer for me. As soon as I hear this, I try and end the meeting. Why would you outsource product development as a technology company? Would you invest in a law firm run by non-lawyers? Me neither. All tech companies need to have lots of geeks.
You serve a niche market: While I always encourage startups to focus on a specific niche to start, the product you are building must ultimately serve a broad market in order to be of interest to VCs. The more specific niche you address (even if’s a big one), the more you need to raise capital from people and funds that understand that niche.
You don’t know the market: If VCs know more about your target market than you do, you’re in trouble.
You are disorganized: Speed is so important to tech startups. If you are slow to respond to due diligence requests that makes investors nervous. If you can’t be completely on top of things when your company is small, how will you be better as your company grows?
You move slowly: This relates to the previous point a bit. While some VC deals come together very quickly (those deals usually have massive traction), most evolve over a few months. If your business is not making huge progress over those months, then you likely will not get funded.
You lack that founder magic: This is by far the #1 killer. While it’s true that some of the biggest startup success (especially in direct to consumer companies) were run by 1st time founders, I’m pretty sure those founders had something special that made investors excited (or had traction). Mark Zuckerberg was a crazy developer (and had traction). Steve Jobs had an uncanny ability to place people inside his ‘reality distortion field’.
Whatever your magic skill is, it has to translate into a superior ability to build product, team or customer base. And if investors can’t see that, they will pass – always!