How to Lose Investors

Founders are getting rejected all the time by investors and most of the time they have no clue why and wonder if there is any way to maximize their chances by knowing where investors drop through the communication funnel and how to save them at each stage. Here I'll walk you through the most common deal breakers and preferences starting from early & immediate losses to later-stage losses.

Table of Content

• Early & Immediate Losses
• Middle-way Losses
• Later Stage Losses
• The Bottom Line

Early & Immediate Loss:

The great mass drops in the very first interaction, the introduction before even having a look at your pitch deck, it’s closer to ignoring than a rejection. Here only you might lose about?80%?of your approaches, for the following reasons:

1) Irrelevance & Deal Breakers:

Investors don't improvise, they are committed to the fund investment scope and requirement. So they might change their scope from fund to fund but never within the same fund. And they don't have such a degree of freedom unless it’s a wealthy individual, not an institutional investor.

So prepare a list of potential investors with their investment scope, stage, geography, and sectors. Unless you are Elon musk and you are building rockets, it’s so uncommon for an investor to suddenly jump to investing in Africa instead of the?US, DTC instead of SaaS, and Pre-Seed instead of Series A. It’s not impossible but seriously what’s the possibility?

There is one exception where you can be so fit and relevant for the investor but he has to turn you down immediately because he is committed to a competitor and his fund policy doesn't allow investing in competitors.

NP: To understand how VCs work; please check?this?article

2) Wrong Channel/Person:

Congratulations, you have narrowed down your list to the right investors, now what is the next problem? Yes, you might find the right investor but still connect with the wrong person or even with the right person through the wrong channel.

In VCs, there are General Partners, Partners, Principles, Associates, Analysts, Scouts

Gatekeepers, you always need someone to reach someone. The difficulty of reaching someone is relative; the larger the investor or the higher the person's rank, the more the gatekeepers & the lower the rank you need to approach.

So you might find yourself directly connecting with a Partner in a?$25M?fund, with a Principal in a?$100M?fund, and with an Associate in a?$1B?fund (Dummy numbers for elaboration). And of course, I talk here about early communication because in the end the deal will be finalized and closed with a partner anyways.

Don't you believe how vital warm introductions are for VCs? There are some VCs who explicitly write on their website that they don't have contact information and if you are a founder who builds a great product then you will find your way to us through the community.

3) Cold Vs Warm:

In the cold approach, you might find yourself filling out an online form or application, sending your pitch to a generic email address, or even sending an email out of the blue to a specific person whom you don't have any mutual connections with. In cold intros, remember to be extremely cautious and respect the investor's time, be brief and concise expecting to take only?1-3?mins of their attention deciding to respond to you.

To warm up your approach, either you build up a relationship with the investor himself, which will take time or the easy way is to find someone in common to make an intro to this investor. The same rule applies, the more difficult the investor, the higher the gatekeeper or mediator you will need.

Sometimes you will not be able to build a warm approach so it’s important to differentiate between cold and warm approaches for the sake of prioritization not excluding. Since still some of these cold approaches do get replies and close deals but with a significantly less success rate than warm approaches.

4) Communication Etiquette:

There is etiquette for everything, right? It’s the set of rules and behaviors that a group of people feels comfortable with. Unfortunately, not all of these rules are global but there are a couple of common practices that would improve your communication:

Do’s:

• Address an investor with his name, written and spelled correctly so you build a personal connection.
• If an investor didn't read your email/message, kindly remind him with a follow-up.
• Keep email/message short and to-the-point -?3?Mins Max - so you don't waste their time.
• Make email/message easy to read and appropriate - using emojis in formal communication isn't appropriate.

Don'ts:

• Don’t spam their inboxes on personal channels like Facebook or Whatsapp.
• Don’t write in all upper case - this makes it look like you are shouting!
• Don’t communicate at inappropriate times like weekends and midnights.
• Don’t send your pitch deck in your first introduction, and don't make it too long.

5) Timing:

This reason has nothing to do with you, an investor may have just closed a couple of deals, and may lack any appetite for a new one. Investors also prefer to invest in hot markets. If your sector is out of favor, it may be harder to sell your vision.

6) Unprofessional/Personal Reasons:

This might be surprisingly harsh but it’s real to the core. In some rare cases, you might be rejected for your religion, political opinions, or your gender. And in more common cases, you might be rejected because the investor just did not like you for no specific rational reason, just the chemistry isn't right.

This reason is a double-edged sword; on one hand, there is discrimination that may work against you and on the other hand, there is an affinity that may work in your favor. Affinity is a natural human trait and it’s about liking someone because of similarities and shared characteristics. So you can find affinity groups including women, black, or any other underrepresented group where the chemistry would be probably right.

Middle-way Loss:

These are the rejections that relate more to your core business and usually take place after a quick review of your pitch deck, business plan, or application, broken down by pitch components:

Market Size:?The market size isn't large enough (Usually if <$1B), or if the investor doesn't believe your TAM. Investors are in the business of multiplying valuation and they want your business to be able to scale up, they will not be able to achieve that if the market size isn't large enough. Not only do investors look for “big” markets but more importantly “growing” markets, because what’s the use of a big market that is declining?

Business Model:?You confuse investors about what you do; you have too many products, services, revenue streams, and segments, and you are fighting on all fronts with a clear lack of focus. Investors like to see a clear core business model and then it can be supported later with more activities & services.

Scalability:?This isn't standalone component scalability is a shared characteristic between business model, technology, and market size, and investors are looking for companies with scalability dynamics to be able to multiply their valuation.

Numbers:?Your numbers and metrics are not good enough for this stage. Your revenues & margins are too low, your unit economics aren't healthy, or your growth isn't stable.

Problem & Idea:?If you are not solving a real problem and you built a solution you are the only one who would use it. If your idea is too generic or too weak.

Defensibility:?If it’s a red ocean and saturated market where each target customer is already satisfied with his current solution and it’s not clear what you offer differently and can't be cloned by anyone else.

Team:?If it’s not the right team to achieve the vision, missing a technical co-founder, industry expert, or entrepreneurial experience. Also being a second-time founder will boost your chances.

Technology:?You are not solving the problem with technology, you are just trying to stick technology into the equation.

The Plot:?I’m stealing this from movie-making, but are you familiar with these movies that get Academy Awards for best actor, director & song, and yet you don't understand a thing from the movie and you feel like it’s missing the plot? It’s the same, sometimes every pitch component looks fine on its own but yet there are too many unconvincing assumptions, the numbers don't add up or the vision isn't aligned with the product roadmap.

Later Stage Loss:

1) Financials & Valuations:

This may include disagreement about the final company valuation, the dilution, the liquidation preferences, the use of funds, or the overall deal structure. It may also be about Cap Table; if dead equity is given to people who are no longer involved in the business like advisors and former co-founders.

2) Terms:?

This may include disagreement on whether the investor should take a board seat or not, voting rights, liquidation preferences..etc

3) Due Diligence:

If founders lied or hide any facts about the company such as lawsuits, IPs, founder's commitment, or anything else related to company liabilities and governance.

The Bottom Line

Each step in the communication with the investor has its reasons since it’s very unusual to get rejected in the very first communication because your financials don't add up and it’s nearly impossible to get rejected in your advanced discussions because of market irrelevance.

• Losing leads at an early stage will save you time, but the higher percentage will probably mean that you did not prepare & research well on your investor's list.
• Losing leads at the Middle-way stage will give you the most insights about your business, but the higher percentage will probably mean that you have severe issues with the business model & conviction that needs to be refined.
• Losing leads at a later stage means there is a real opportunity to be approached. Still, the higher percentage will probably mean that there is a lack of investment readiness, and company structure issues to be solved with your partners, investors & legal team.

The above reasons don't have the same weight in different investment rounds, so in Pre-seed/Seed the Team & Defensibility may be more important than Numbers. In later rounds Growth, Technology & Business Models may be more important than Defensibility and so on. It’s also important to know that you rarely get rejected for a single reason, you most probably will have a combination of leading and supporting reasons for the rejection.

NP: To learn more about how to interpret, avoid & respond to rejection, what to do internally after being rejected, and why investors don't provide a reason; please check this article