6 Biggest Reasons Venture Capitalists Reject Your Startup Immediately!

There are a lot of things that can hinder your startup from getting funding. The most obvious is the lack of cash. But the level of cash that you have isn’t the only thing that investors look at when evaluating new companies. There are so many other factors that they consider before approving any deal.

Venture capitalists—VCs—are looking for a specific set of qualities in the startups they’ll invest in. If you have your venture capital firm read through your business plan and decide whether you’re worth investing in, then you’ve got a lot going for you.

But if you don’t? You’re not home yet! Venture capitalists reject startups that perform poorly before and during their their pitch as they are looking for red flags that indicate that your startup will fail before it even gets off the ground, as well as clear signals that it lacks what it takes to succeed after its initial financing runs out.

In another article, we explain the main factors that could increase your chances of success with venture capitalists using successful Silicon Valley examples.

Here are some of the biggest red flags venture capitalists look for when deciding how to reject your startup.

Venture Capitalists Reject Many Startups Every Year

Entrepreneurs should be aware that venture capitalists may only have the funds to invest in a small number of businesses out of the more than a thousand they review each year. Therefore, by default, you would say “no” to your startup.

As a result, you will probably get turned down by VCs several times. Although some investors might be more courteous and considerate, the reality is that they are probably not going to be overly sensitive to you and your business.

Every meeting should end with a thank-you note, and you should definitely reply if you are rejected, which can happen in person or more frequently over email. Additionally, state that you value their feedback and that you reserve the right to occasionally update them as your business develops.

Before you pitch your startup, there are important red flags indicating why venture capitalists reject startups.

1. Your Business Plan Is Too Long And Complex

Long, complex business plans don’t appeal to venture capitalists, even if they’re filled with all the right numbers and graphs.

What venture capitalists really want to know is how your business plan is going to actually make money and how they can get a slice of it. In other words, how are you going to make money?

Long business plans can be confusing, especially when they’re filled with lots of numbers and graphs, and they can also seem to take the reader on a very long journey to arrive at the point.

All that can happen is that the reader gets bored, confused, or confused again—and that’s when venture capitalists start to lose patience and could be one of the reasons venture capitalists reject your startup.

2. There Are Disagreements Between The Team And The Investor

Venture capitalists are looking for a strong partnership between entrepreneurs and their investors. The team is looking for investors because they have a vision for the company, but their job is to make sure that the investors get exactly what they want.

So sharing the same vision is important as we explain in this article. Founders and investors will be working together a few important years so sharing vision and the future roadmap is important.

They do not have a job to make the company successful. So, if you see that the entrepreneurs and investors are getting into debates, it’s a big red flag. It is also important how the two sides handle disagreements and reach a joint decision.

On the other hand, the disagreements may not be about the business plan, but about the way the money should be spent or the roles each person should play within the company. If disagreement cannot be dissolved, it is likely that venture capitalists reject the startup.

3. Your Team Is The Biggest Red Flag

Most of the startups that collect venture capitalists’ money fail before they even get off the ground. That’s why venture capitalists are mainly interested in companies that have a good chance of success.

They want to invest in companies that will make money, and they want to invest in teams with the potential to turn their business into a success story.

So, if you’ve got one or two founders, and they’re the ones taking all the risks (and who signed all the papers for your business), it’s a red flag.

If you’ve got a large team that includes some people who’ve only got a minor role in the company, it’s a red flag. If, for example, the person who’s supposed to work on engineering is also supposed to design the product, it’s a red flag.

Venture capitalists reject startups that have team issues or free riders in the team that clearly show organizational and management issue within the startup.

4. There’s Only Been A Demo Or Sneak Peak

VCs, like most people, love a demo. They want to see what your product is like and how it works, and they also want to see how you intend to make money.

Of course, you want to demo your product to potential investors, but if you demo it once, it’s a red flag. Venture capitalists want to see your product working and coming together, so they’re not interested in just a sneak peek.

If you’ve only demoed your demo or sneak peak once or twice, it’s a red flag. They want to see how it works, how you intend to turn a profit, and how you intend to expand.

This makes a lot of sense. Unless you actually test your minimum viable product or a functioning prototype at least and show them the good results, there is not enough evidence for venture capitalists to trust your venture.

5. There Are No Live Customers — Or, They Will Be Happily Paid Once

VCs don’t just want to see evidence of a product that’s already been built, they want to see evidence of a product that’s being used by real people.

You may have built an MVP or a demo, but if you’ve got no customers who are willing to pay you for your product, it’s a big red flag. On the other hand, those customers may not be eager to pay you right away, but they are happy to use your product and make money.

They’re happy to be your beta customers, and they’re willing to give you feedback on how you can improve your product but they have no reasons to be your paying customers.

Moreover, to scale a business you need paying and returning customers. If you can only grow the customer base through advertising, it is not sustainable growth. You need returning buyers to grow the revenue and profit.

6. Your Product is Not New or, Perhaps, Too Radical

Your product may seem like a great idea, but if it’s something that’s been done before and improved, it’s a major red flag.

VCs are looking for startups that are taking a new approach, whether they’re making a new product or providing a service that hasn’t been offered before. They are taking major risks and there has to be high potential returns on their investment.

That’s the thing with venture capitalists: They don’t care if your product is a little bit old or a little bit new. What they care about is whether it’s something that’s never been done before and whether it’s something that’s improved to the point where it’s infinitely valuable.

Venture capitalists reject the idea sometimes when it is too radically new – depending on their approach of course. If you are able to show some benchmarks – perhaps from other industries – it could be helpful.

Conclusion

VCs want extremely high returns within a certain time frame, which might not be applicable to your particular startup. Perhaps the size of your market is simply too tiny, and there isn’t a sufficient demand for or willingness to pay for your offering.

Maybe there isn’t enough merger and acquisition activity in your industry or the company’s valuation in relation to revenue is too low.

Venture capitalists are looking for a good set of qualities in the startups they invest in. If you’ve got them, they’ll happily put money into your business and help it grow.

If you don’t, they’ll happily turn you down and let you know it. They won’t do this if your startup is worth investing in, so make sure you check out these red flags to see if your venture capital firm is one that you can impress!