Something is wrong. 20 initial meetings is almost never enough to fully complete a round of funding. But 20 meetings with the right investors should result in at least a handful of follow-up meetings and requests to dive a little deeper. This article explains the most common reasons, including some the investors will rarely reveal.
We are used to the funnel concept related to a sales pipeline. A fundraising campaign is the same. Lots of outreaches result in fewer meetings, which result in fewer follow-up meetings, which result in fewer verbal commitments to invest and even fewer actual closed investments.
Really impressive results might look like this:
50 initial meetings –> 25 follow-up meetings –> 8 verbal commitments –> 6 closed investments
By the time you finish your successful fundraising campaign, the results might look like this:
100 initial meetings –> 40 follow-up meetings –> 10 verbal commitments –> 6 closed investments
Like with a sales funnel, you can easily calculate the conversion rates from one funnel stage to the next. I’ve never seen industry averages for this in the fundraising context, and I’m guessing the results vary so widely that even seeing averages wouldn’t be very helpful.
Time to Pause and Reflect
If you find yourself in this position, after 20 or more investor meetings without any movement to the next stage in the funnel, you’ve got to pause everything and do some deep reflection and analysis. Scratching and clawing to get your next 20 meetings is unlikely to yield much different results without some required changes. The hard part is figuring out what changes are needed to gain the desired effect.
Ultimately, the CEO has to accept accountability for everything that happens with the startup they lead – including the success or failure of their fundraising efforts. The best founders are highly-confident optimists that are certain they’re going to build a great company. Because of this, and since the stakes are really high with each round of funding, some that encounter struggle blame others. “Investors are idiots” might slip from their mouth. And while I’m sure founders come across investors that are unethical, unorganized, and even idiots, categorically placing blame elsewhere isn’t going to help achieve success.
Side Note: This article does not attempt to decode issues with bigoted investors or those with unconscious bias against underrepresented founders. Those issues are real and, when they happen, plenty of blame belongs with the investor. Advice for dealing with this best comes from experts that understand, and have experienced, the issues much more than me.
Investment Thesis Mismatch
The most common mistake I see made is meeting with the wrong type of investors in the first place. Professional investors, which includes serious angel investors, family offices and venture funds, all have an investment thesis that is unique to their own investing strategy. If you don’t align with their thesis, they almost certainly will not invest. An investment thesis combines certain, but not necessarily all, of the following elements:
- Stage: pre-seed, early seed, late seed, Series A, etc
- Industry Segment
- Product or Technology Category
- Business Model: subscription software, e-commerce, online marketplace, etc
- Valuation Range
Other elements exist, such as founder demographics, social impact, and just about any way you can imagine segmenting the world of tech startups. But the ones I’ve listed are the most commonly encountered.
If an investor has four elements in their investment thesis, you likely need to match at least three of them to give some chance of them engaging you with follow-up meetings and additional due diligence requests.
How do you find out about their investment thesis? Venture funds make it easy. It’s right there on their website and can be further validated by looking at the companies on the Portfolio page of their website. Angel investors don’t have websites, but their prior track record as reported on LinkedIn can give you some indications.
Ask the Question
My favorite question to ask when I’m confused by the lack of investor interest is this: “What would you need to see for this to be an exciting investment?” It is an open-ended question that can’t be answered with a simple yes or no. Better yet, it mostly forces the investor to reveal what their major concerns are. Once they give you an answer, don’t just write it down and walk away. Instead, do the following:
- Voice back to them what you understood them to say. This gives them a chance to correct your understanding.
- If they weren’t specific enough, then get them be more specific. Here’s an example:
- Investor: “I’d like to see more traction than you currently have”
- Founder: “I understand, you’d like to us to increase our monthly revenue. Is that true, and if so, what level of monthly revenue would be exciting to you?”
- Address their concern right then, if it’s something you can address. The investor might have been confused about something or incorrect in their assessment of something.
- Ask the question again to make sure there aren’t other inhibitors: “In addition to reaching $__K in monthly revenue, is there anything else you would need to see for this to be an exciting investment?”
Hopefully you see how valuable this follow-through is to understanding where you really stand. It’s a standard sales process, but translates to the fundraising process equally well.
If your first meeting with a venture fund is with an analyst or associate, you might not get the most accurate responses to the magic question. That’s because they don’t have tons of investing experience. Their answer might be one of the most common reasons for rejection they hear when they sit in the back of their partner meetings. In this case, try and get a second meeting that includes a principal or partner.
Most Common Issues
If you ask the question, and the investor feels any obligation to reveal why they aren’t excited, I predict you will hear one or more of the following issues.
Not Enough Traction
I predict this will come up a lot for those reading this article. Investors at each stage are willing to take associated amounts of risk commensurate with that stage. For example, trying to raise a large, institutional seed round with only early seed-stage traction causes a mismatch.
Even if you’re raising an equity round of funding, in which the lead investor proposes their terms via a term sheet, they’re going to want to know what your valuation expectations are before they do too much investigative work. If your expectations are more than about 25% higher than what they are initially thinking after your first meeting, they could simply shut down the process.
For this reason, I recommend “test driving” your valuation expectations with prospective investors before you formally launch your funding campaign. You’ll also find that traction concerns and valuation concerns pretty much go together.
Problem Isn’t Worth Solving
There are infinite problems in the world that could be solved, but that doesn’t mean people or companies will actually pay to have them solved. Investors like investing in aspirins versus vitamins (you can learn about this in my article titled “Vitamin or Aspirin – Which are you Offering?”). You might eventually prove the investor wrong with an exciting track record of traction. But if you already had that traction, you wouldn’t be in this situation.
The investor might feel your total available or serviceable market size is too small. Or maybe it’s too crowded and competitive. Finally, some markets are too hard to crack into because they’re already dominated by a small number of incumbents with suitable solutions (yours needs to be 10x better, not just incrementally better).
You might not yet have enough full-timers committed to your venture or maybe your team is lacking enough members with relevant experience or a successful track record. In the really early days, advisors might be the only way to fill experience gaps. But quickly after, you’ll benefit greatly by replacing them with experienced full-timers.
Excessive Services Revenue
You might be one of those startups that began as a services/consulting company that built a product along the way. If your new funding is going to be used to launch, or advance, the product-related aspect of your business, investors might be concerned that you haven’t completed enough of that transition. It’s actually a pretty tricky transition to successfully execute and your new investors aren’t going to give you much credit for your prior services revenue.
- You can read much more on this issue in my article titled “When Service Companies Build a Product“
You might not be raising enough to get the investor excited about the amount of new runway you’ll gain and, more importantly, the outcomes you can accomplish (read more on that in my article titled “Investors Write Checks for Outcomes, Not Activities”). I see this phenomenon most frequently with founders coming out of a bootstrap phase (read my article titled “How Long Should You Bootstrap?“).
You might conclude the answer is to simply double or triple your target funding amount. That might bump you to a new category of investors (ie – from angels to VC’s) and likely also doubles or triples your desired target valuation, so that you don’t experience excessive dilution. But you might not have the traction to justify that higher valuation.
Things They Might Not Tell You
Although it is disappointing to learn any of the common issues mentioned above, at least you know what you need to fix, so that you can get back on the fundraising trail. What’s most frustrating is not learning what’s really causing the lack of interest. There are certain concerns investors sometimes would rather not reveal, and so they give some other excuse instead.
Following are some of the more common such issues.
You aren’t giving an effective presentation of your business plan and associated investment opportunity. Maybe the flow of topics is wrong (read my article titled “Typical Pitch Deck Flow”), maybe your messaging is poor, or maybe you aren’t an effective presenter.
The investor might feel like you aren’t the right person to lead the company to the next stage. It happens quite often that the founding CEO isn’t the right person to lead the company all the way to exit. But maybe the investor can’t even see you successfully getting to the next stage. Or maybe you’ve already notified the investor that you’re open to a CEO swap-out, but they know how difficult it is to find the right new person to lead the company. It’s not just their needed skills and experience, but their culture fit and willingness of the team (incl the founders) to support a newcomer as CEO.
There’s a fine line between extreme confidence and cockiness. Cocky founders have all the answers and, therefore, aren’t open to advice or opinions. “Open to” simply means listening and processing, regardless of whether the advice is implemented. Many investors refuse to invest in cocky founders. In fact, I’ve met cocky founders with 20 straight unsuccessful investor meetings (none triggered a follow-up) and they quickly disregarded every possible cause I described.
Messy Cap Table
It is not typical for an investor to get a copy of your cap table before a first meeting. But during the first meeting they might ask questions to understand what your cap table currently looks like. Having an excessive number of line items for your stage can cause concern, especially if the investor worries that some cleanup will also be needed. Let’s address those two issues separately:
- Excessive Line Items – The more investors you have on the cap table, the more distracting it can be for the CEO to answer their questions, address their concerns and secure their votes on various needed business matters.
- Cleanup Needed – “Dead weight” might exist on your cap table from a co-founder or early employee that gained an outright grant of equity (versus vesting), but only worked for a short period of time. Or maybe you have some investors that are likely unaccredited, per the SEC definition. These are two common issues needing cleanup, but successfully executing that cleanup can get messy/ugly and ultimately not succeed.
For a longer list of things that contribute to a messy cap table, and a deeper explanation of each with accompanying remedies, read my article titled “Common Causes of a Messy Cap Table“.
Especially Long Slog
If you’ve been at this venture for much, much longer than most other startups at your level of traction, investors might worry that there’s something more fundamentally wrong – either with you as the CEO or your general business potential. Maybe this is due to a very long bootstrapping period, with extremely limited resources with which to advance (for more on that, read my article titled “How Long Should You Bootstrap?“)
Getting All the Way Across the Funding Goal Line
Although this article is written from the perspective of gaining follow-up requests after an initial meeting, the truth is that getting stuck too often at any stage in the fundraising funnel should trigger asking the magic question to figure out what’s wrong.