It can be tempting for any entrepreneur to talk about their company with strangers. Doing so helps validate your idea and build support within the startup community. However, you should also be prepared for people to have questions and possibly even doubt your business idea.
This is especially true if you’re just starting out and don’t have a lot of experience in running a venture business. Investors are likely one of the first groups who will question your plan to build a company as they can be very skeptical of new businesses without working track records or evidence that it will succeed in the long run.
So you might face a number of difficulties finding investors for your startup.
If investors are questioning your business idea, there are probably many other rational reasons why they are doing so as well.
The following list of reasons explains why investors aren’t investing in startups due to concerns other than poor returns or riskiness of the enterprise.
1. Investors Don’t Want To Invest In Risky Businesses
A common reason for the difficulty of finding investors for your startup is because they don’t want to invest in risky businesses. It’s important to understand that every investor is different and they will have different risk tolerances.
Some investors may not like to invest in any early-stage startups that are perceived as risky while other investors may simply want to avoid the risk of any given industry.
To understand what investors mean when they say they don’t want to invest in risky businesses, it’s important to understand the process of investment.
What is an investment? An investment is the process of transferring property rights in assets. When an investor puts money into a startup, they are essentially transferring a property right to the company. The investor gets the rights to a share of the profits or returns from that company. You can read more about the process of investment, including some interesting examples of startups fundraising process, in this blog post.
Finding investors for your startup could be tough because if your startup fails to deliver, all the money invested by the investor might disappear without anything tangible left for the investor. If the investor has no or little experience with
2. Investors Are Looking For High Returns On Their Investment
Another reason finding investors for your startup is tough is that they are looking for high returns on their investment (given the high risk discussed previously).
An investor would be very discouraged if they see lower returns than other alternative investment opportunities such as the stock market or investing in the housing market or the bond market. This is because such markets typically have lower risks compared to startups.
Investors will care more about the opportunity to earn a return on their investment than the absolute amount of their investment. This is especially true for larger institutions who have a greater risk tolerance and are looking to diversify their portfolio with a variety of investments.
If you are pitching to investors, pay extra attention to the financial projections (source). While you numbers should be ambitious enough to attract them, you should have evidence to demonstrate that it is possible to achieve these projections in the future.
3. Investors Want To See Evidence Of Traction Before They Invest
Another reason finding investors for your startup is tough is that they want to see evidence of traction before they invest. As we can see in this blog post, Google successfully showed traction to its early investors before they raise capital.
When investors look at your business, they will have a specific idea of what they are looking for to see. They may want to see evidence of customer growth, revenue, or traction in another way before they invest.
For example, investors may want to see evidence of customer growth in the form of customer acquisition campaigns or customer retention through product usage.
Some investors may want to see evidence of traction in the form of active users or customer retention. Investors may also want to see evidence of revenue, such as case studies of large customers or proof that your product will generate revenue in the future.
If you fail to show evidence of traction or if you cannot convince potential investors, they are not going to consider your startup seriously.
4. Investors Are Worried About Lack Of Company Data
Another reason finding investors for your startup is tough is that they are worried about the lack of company data. When you’re starting a company, one of the first things you will have to do is hire a team and build a product.
Once you have a product, you will have to keep track of customer data and product usage to see if there is traction for your product. While you don’t have to have a lot of data at the beginning, over time as you grow, you will need to keep track of data.
In addition, you need to show insights from the data and what you actually have learned from the customer (and other stakeholders) data to improve your business model. Such learnings that are evidence-based can tremendously help your growth and finding investors for your startup.
It’s important to understand that investors are worried about the lack of data as a sign that your business is likely not ready for investment. It’s important to understand that investors will only invest if they see evidence of data.
5. Investors Are Looking For Transparency And Team Composition
Another reason finding investors for your startup is tough is that they are looking for transparency and team composition. When investors look at a company, they look for evidence that the team is experienced and has the right composition to lead the company to success.
This is especially true for large institutions who want to diversify their portfolio with a variety of investments.
In the early stage, founders are important to have complementary skills and personality traits to help the startup growth. We talk further about this in this blog post if you would like to know more.
It’s important to understand that you don’t have to have a seasoned team at the beginning and you can even hire new team members at different stages of the company.
However, it’s important to be transparent about the team composition and their role within the company. Investors will only invest if they see the right team composition.
6. Investors Don’t Understand the Business Model
Finally, finding investors for your startup is tough because investors don’t understand the business model. When investors look at your business, they will look to understand what your business model is within your industry.
Your business model is the way that you generate revenue from your product or service. It will usually be one of the ways that investors look for. If investors do not understand how you create and capture value in details or cannot relate to it and its future promise, they will be unlikely to consider your startup for investment.
For this reason, take some time in your pitch or the Q&A you have with investors to explain how you create and deliver value to customers and how you can capture part of this value. Some startups use the business model canvas or the lean canvas to showcase their business model in just one slide.
Conclusion: Finding Investors for Your Startup is Never Easy
These are just some reasons why investors aren’t investing in your business. It’s important to understand that not all investors will fit into this list and some will have different reasons why they are not investing in your business.
Nevertheless, it’s important to understand if these are the main reasons why investors aren’t investing in your business.
Having a list of these reasons will help you better understand why investors aren’t investing in your business and allow you to better prepare for each scenario.
