3 Reasons Entrepreneurs Fail to Secure Funding
The necessity of learning from past failures and adjusting your investor pitch to avoid the mistakes that have led many other startups down the road to failure has never been more important.
By Paul Jackson •
Opinions expressed by Entrepreneur contributors are their own.
The startup game is a risky business, and for many entrepreneurs navigating the competitive landscape and securing the funding needed to survive is a significant hurdle that isn't easily overcome.
The truth is, there is a limited amount of funding available to startup founders and innumerable new ventures born every day that will be competing for it. Investors simply can't open their wallets for every good idea that walks through their door. (Frankly, those are a dime a dozen.) The ones that do secure funding, are the ones that have demonstrated how that good idea will actually come to fruition.
Consider the three most common mistakes your peers have probably already made when looking for investment and how you can be prepared to avoid the same fate as so many founders before you.
1. Not understanding your financial situation. Experienced investors know there are few legitimate overnight successes and that realistically they will be lucky to see a return on their investment in the next decade.
Related: The Correct Answers to 'How Will You Use My Money?'
Many newbie entrepreneurs, eager to prove the merits of their great idea, make the mistake of entering the discussion with an unrealistic value of their company. Not being realistic about the financial situation of your startup from the beginning shows a lack of understanding and frankly maturity, in regards to your ability to lead a company to a successful return down the line.
Ideally, an investor is looking for a company with a clear and scalable business model they can get behind and help grow. I suggest taking advantage of the various online-evaluation tools out there that can help you determine a reliable and defensible value of your startup's worth before you even enter into the discussion.
2. Underutilizing the management team. Great leaders aren't successful solely on their own. They surround themselves with people that add value to their business, and you need to do the same. Investors need to feel confident that your team is the right one to take your company from a small, great idea and turn it into a high-yielding investment for them. The goal here is to convince an investor that your team is prepared to face all the challenges and criticisms that come with running a business. You can't do that if you haven't fully vetted your management team.
Related: A Step-by-Step Guide to Nabbing an Angel Round
It's important to prep your team before an investor meeting and ask them about their past experiences and failures, understand how that might benefit your business in the long run and use this information when speaking with investors.
3. Lacking a clear go-to market strategy. Entrepreneurs just starting out often make the mistake of not understanding where their idea fits in the current marketplace. (If you aren't targeting the right market the chances of a successful exit will be small.)
Having a clear go-to market strategy that demonstrates the potential for your company's sustainable competitive advantage is of the utmost importance to an investor. That said, some entrepreneurs have a difficult time articulating a clear plan to reach a target audience and how to scale it over time.
If you failed to secure funding after an initial round of investor meetings, consider reevaluating where your idea fits or the marketplace all together. Perhaps the original market is too small or too crowded, but with a slight adjustment, your product could work in a different market.
The competition for startup funding is likely to only get more intense as we see more and more of these billion-dollar exits and high-profile IPOs in the news. The necessity of learning from past failures and adjusting your investor pitch to avoid the mistakes that have led many other startups down the road to failure has never been more important. While there are many reasons a startup doesn't secure the funding they need, it usually boils down to some combination of the three discussed here. If you can prepare for those challenges before entering the negotiation room you will be in the best position to make a positive impression on an investor and walk away with the funds needed to stay in the game.
Related: 4 Things Every Entrepreneur Should Do Before Meeting an Investor
