So you made a plan to raise a round of financing and were greeted with a resounding yawn. You're not alone. Raising money for a startup is really hard and usually takes much longer than you think, with many founders discovering they need to meet with far more investors than they'd thought.
Here's the thing: Venture capitalists are trained to say no. There are a limited number of investments they can make, and they're primed to look for reasons to withhold funding—especially lately, as VCs show more caution than they did just a few years ago.
These challenges aren't insurmountable, though, and getting rejected for funding may even be a useful experience for some startups. Here's a seven-step guide, based on my experience as a startup advisor, to using that setback as fuel to propel you forward.
Venture capitalists and most angel investors are polite, at least to your face. They don’t want to earn a reputation as someone who isn’t supportive and easy to work with. So the very first thing you can do after getting turned down is to ask why. The reasons that they give for passing on an investment may be valid, and possibly even something that hadn't occurred to you initially.
But don't just ask the VCs you've pitched to. It can also be useful to get back-channel feedback from the rest of your network. Describe how you pitched your startup and why investors ultimately told you they chose to pass. This may help you discover that you've got to rethink your business model, your target list of investors, or your marketing approach toward them.
Investors are obviously looking for companies that have spectacular growth potential. In other words, the bar is high. As an entrepreneur and startup CEO, you already know that you need to have a good understanding of the potential size and growth of your target market and understand your customers’ needs and pain points. Likewise, you know that you need to have a realistic grasp of the current and potential competitive landscape.
A rejection is a useful red flag that your understanding on these fronts may not be as ironclad as you'd thought. It may turn out that your business model is as sound as you've always believed, but getting turned down for funding is a sure sign that it's worth taking a second look.
Sometimes investors are concerned that you're addressing too narrow a niche market. Other times they may think you're targeting one that's too broad. Whatever the case, VCs and angel investors want to support companies that will address a potentially large, rapidly growing market. In other words, it's all about your forecasts and your plans for capitalizing on them.
That means validating your financial projections from a "top-down" perspective when it comes to market size and growth potential and "bottom-up" approach to your customer and sales funnel. And your product and marketing plans need to follow suit. So getting rejected for funding may suggest that a pivot is in order. Or maybe you just need to readjust by a matter of degrees—to focus on a slightly different product or target market. If you decide to do this, make some progress along that front before going back to investors.
As an entrepreneur approaching investors these documents are your stock in trade:
- a compelling elevator pitch
- a succinct executive summary
- a business plan that shows a strong business model
- a set of financial projections with the potential to deliver a 10–30x return on investment
If investors have rejected you, it may be time to go back to all four of those materials and see how they can be improved. Taken together, they're the narrative you're telling about your startup's future success. And getting turned down is an indication that the story could be better.
Your chances of getting funded might rise if you focus on so-called "smart money" investors. Like any sales process, you need to build a target list and then work that list. Smart-money investors have domain expertise in your target vertical markets, or else deep technical expertise in your product area.
If the VCs you've approached so far don't exactly fit that bill, you may need to draw up a new list. On the other hand, if you've pitched smart-money investors unsuccessfully, you might be missing some of the information they're likely looking for. You want to have investors who can buy into your vision—but your vision needs to be detailed enough, since they'll understand the dynamics of your industry or technology better than most.
It may be that you just aren't ready for a certain category of investors. VCs tend to move downstream and are more likely to invest in growth-stage companies versus seed stage or even Series A. So maybe you just need some more bootstrapping first.
Is there money available from your friends and family? Maybe you’re far enough along to get angel investors interested in your deal. With the passage of the JOBS Act earlier this year, there are also new sources of funds from equity crowdfunding. Or maybe a small-business loan is right for you. For some technologies, there are government grants available. The point is to get more creative and flexible than you might have been previously.
It may be that you have to communicate with investors over a period of time and demonstrate that you're meeting key milestones. What are your key performance indicators, or KPIs, that will validate your business model a bit better? What have you accomplished that reduces technology and market risks?
Ask yourself what you can do to build up more of a track record and show your progress when you go back to investors a second time. You might just need to have more to show for yourself. So stay patient and think strategically, and you'll boost your chances of bouncing back.