Startup Mistakes That Drive Angel Investors and VCs Away! Part 1

Startup Mistakes That Drives Angel Investors and VCs Away by Jerome Gentolia: Venturestab

Self Portrait by Lee Haywood via Flickr

Entrepreneurs need to be sentient of the reasons why Angels and VCs walk away from a deal. Here are a few guidelines that you need to avoid:

Nothing to show for but an idea.

Many entrepreneurs make the mistake of sending pitches of ideas but have nothing to show for. Make sure you don’t fall into this trap. Having a minimum product should be your minimum goal before scouting for an investor. Having minimum product demonstrates 2 things:

  • You are committed to your startup that you invested time and money to build a minimum product.
  • You are capable of finishing something.

If you are a successful serial entrepreneur then investors may not think twice about throwing money at your idea but if you are new in the game, you have to goad investors by earning it.

If we could just capture 0.05% of the market.

In  “5 Things You Don’t Want To Tell Investors” Ken Kaufman wrote:

“What you are really saying is that you have spent NO time understanding your target market and customer segments and you have no idea who will really even buy your product. You must do research in this area to speak credibly and have valid lead generation and customer acquisition assumptions, not pie-in-the-sky wishes, hopes, or dreams. Customer validation early and often will not only help you raise money, it will help you figure out more quickly what your company will actually sell.”

In “Pitching A VC Why Financials Matter” David Hornik wrote:

“It is almost assuredly the case that an early stage company’s projections are wrong. In the last decade I have only seen one company actually hit the numbers they pitched me on. The rest of the companies have missed by varying degrees of big time. But the real question when listening to a pitch isn’t whether the company will actually hit the numbers they are projecting, but rather what those projections say about the entrepreneur and the business? Is the entrepreneur focusing on the right things? Do the financials make reasonable assumptions? If the assumptions are anywhere close to right, is there a big interesting business to be built? Smart investors will dig into your financials to get a better sense of how you are thinking about your business.”

Many entrepreneurs make the mistake of giving unrealistic market projections as if they are really going to take on the world. But when asked how they are going to do it they hit a stump! Entrepreneurs lose credibility right away by giving nebulous projections. A statement like “if we could only get .05% of the market” is an illusion of grandeur and will immediately erode the incipient relationship with any investor!  Metrics and projections is something you should handle with deft, it should demonstrate that your business hypothesis is grounded in reality.

This brings us to point #3.

Lack of ability to pivot.

Startup Mistakes by Jerome Gentolia

Mistakes by opensourceway via Flickr

You should demonstrate ability to pivot. Since it has been established in the startup world that most initial ideas might not work, it is important to prove that you have the technical skill to pivot into something else.

Most startups pivot into something else after initial feedback and reaction from customers. Again this just reaffirms point number#1. If you cannot build a prototype in the first place then how can you expect to pivot if your initial product does not have market fit?  Rovio and Groupon are two companies that successfully pivoted after a number of attempts. Rovio worked on 49 games before hitting on the jackpot; Angry Birds. Groupon, on the other hand, from being a platform for political activists pivoted to a new form of commerce advertising serving the needs of a particular market for daily deals.

Eze Vidra in his blog “Pivot Don’t Give Up” states that:

At the heart of Lean Startup methodology is the concept of “Pivoting”, essentially changing the product, the target market, the business model, etc when the startup can’t prove its original hypothesis.” 

The statement by Eze Vidra and the list of companies that pivoted is evidence enough that real metrics is what matters not projections based on market size.

Keep in mind the possibility of your current startup going down the tubes when there is no resonance with your customers, get to learn your users and target market early. Re-evaluate and learn to accept that if there are not enough followers and fans of your idea, then it’s time to pivot into something that people can be passionate about. Focus on building a culture that is user-centered. This will be a big help when you need to execute a shift or pivot in your venture.

Asking an investor to sign an NDA.

On Protecting Your ‘Secret Sauce’ Andre Gharakhanian wrote:

“Thinking of asking a venture capitalist—or other investor—to sign a non-disclosure agreement? They won’t sign them. Ever! Asking them to sign one will make you look like a clueless rookie.”

I suggest you read Andre’s blog for he listed some great points.

This is one of the most common mistake entrepreneurs make. I wrote a more detailed blog about this subject on “Why Startups Should Not Ask Investors to Sign an NDA” in it I recapitulated the reasons why it investor’s do not sign an NDA and why it is a bad idea.

Sending deals through “over the transom email or cold calling”.

This exercise of emailing investors whom you have no relationship with is an exercise in futility. This would not help build a relationship with VCs or investors at all, and is just a waste of time and effort. If you want to succeed, go out and earn that introduction – prove that you are, indeed, an entrepreneur.

Good entrepreneurs can always find warm introductions to a VC or Angel Investor. This shows how resourceful and connected you are as an entrepreneur. The following blogs below offers advice and tips.

How To Effectively Reach Out To Angel Investors and VCs

Should You Email Your Business Plan To Every VCs and Angels?

On the next blog I will write another set of “5 Mistakes” to avoid. Expect more don’ts and boo-boos to avoid in the next installment.

 

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