5 Deal-Breakers Founders Say When Raising Capital
Do you make these mistakes when pitching investors? Here's a cheat sheet for founders
Every year, 50 million startups are launched. For perspective, that means that every single day, 65,000 entrepreneurs try to bring to life their brilliant idea.
What’s the deal with these crazy numbers? And why haven’t you heard of more of these ventures?
The answer is simple: Most of them peter out before you can flip through their pitch deck.
It’s well-known that 90% of startups fail. Some fail for the usual reasons: Bad ideas. Poor management. Lack of customers. But almost 10 per cent fail for a reason that’s eminently fixable: they can’t raise money.
Happily, fundraising can be learned. Founders just need to stop making certain assertions. Here are the five biggest deal-breakers I’ve seen in my career as both a founder and investor.
Assertion #1: “We Don’t Have Any Competitors.”
This is the most common red flag of them all. Let me be frank: There is no company, anywhere in the world, which is free of competition. If you think you’re unique, you’re thinking too narrowly.
Netflix CEO Reed Hastings expresses this view perfectly. He says that Netflix is squaring off not only against the likes of H.B.O. but also sleep itself. “If you didn’t watch Netflix last night, what did you do?” asks Hastings. “There’s such a broad range of things ... to relax and unwind, hang out, and connect — and we compete with all of that.”
In other words: At a minimum, you’ll always and forever be vying for people’s time.
What’s more, most venture capitalists know the market, as well as founders, do. They’re pretty good at research. So err on the side of transparency. They would much rather support someone who acknowledges reality than someone who boasts that there’s nobody else who’s doing what s/he is.
Assertion #2: “Our Product Is Superior.”
What could be objectionable about calling your product “superior”? The last time I checked, nobody wants to invest in a product that’s average, right?
The problem is the word “superior.” It’s too subjective. Your product may indeed have more features or may result from cheaper supply chains, but ranking yourself in this way will only invite arguments.
So, instead of focusing on why your product is better, focus on how your product helps customers who are currently underserved. The difference is subtle, but this reframing will help you speak to the needs of the market rather than your own claims.
Remember: Investors want to back people who understand how to differentiate their business.
Assertion #3: “We Haven’t Looked at CAC Yet.”
Investors speak — and expect you to know — a particular language. If you’re unfamiliar with this argot, here’s a cheat sheet.
Let’s say you’re in a sea filled with fish. That’s your total addressable market (TAM).
But you can row only in a particular direction. That’s your serviceable available market (SAM).
And from that direction, you can fish only in a particular area. That’s your serviceable obtainable market (SOM).
And yet, knowing your TAM, SAM, and SOM is mere table stakes today. If you want to woo a top-notch investor, you need to identify and itemize another three-letter acronym: Your CAC.
CAC stands for “customer acquisition cost,” which is basically how much it costs for you to fish in your SOM (to continue the metaphor). Without this metric, assessing your prospects is too difficult. No wonder serial entrepreneur Neil Patel calls CAC “the one metric that can determine your company’s fate.”
Assertion 4: “Our Business Will Be Profitable in X Months or Years.”
Investors are a curious species: They value growth more than profit. As illustrated by the T.V. show Silicon Valley, investors care more about what you’re worth than how much you earn.
That’s because they are not retirees looking to cash stock dividends each month. They’re professional gamblers looking for a 10x score.
Accordingly, an investor-friendly founder will shy away from specific projections of profit. Don’t get me wrong: I’m not Masayoshi Son; I don’t advocate the pursuit of money-losing expansion at all costs. But I do believe that the well-known path championed by Amazon, which has long reinvested its revenue rather than rewarding its stockholders, is both financially and strategically smart.
Let me put the point this way: Investors are patient. The way to their checkbooks is to emphasize your long-term potential, not your short-term returns.
Assertion #5: “Our Other Investors Won’t Commit Until We Line Up a Lead Investor”
One of the biggest fears for an investor is missing out on the next Facebook or Uber. So, like many investors, instead of telling a founder “no,” they might say, “We’d love to reconnect after you’ve lined up a lead investor.”
Let me level with you: This is typically a “no.” And when you, as a founder, are asked about your existing investors, you’d be well-advised to avoid trotting out the lead-investor line.
Instead, truth be told, you’d be more effective saying: “We’re in talks with a variety of folks.”. Or, “We’ve been asked to keep that list confidential, but we can tell you that interest is robust.” Assuming, of course, the foregoing statements are truthful. VCs have highly sensitive B.S. detectors.
Investors are like actuaries: At the bottom, investors assess risk. As a founder, if you want to close a deal, you need not only to inspire imagination; you need to also demonstrate that your risk is worth the reward.
The easiest way to do that is by grokking the lingo. After all, even the best idea can be undermined by a slip of the tongue. So, before your next pitch, do a dry run. If you blurt out any of the above phrases, make sure to course correct while there’s still time.