Part of what I do on a regular basis is trying to rely more and more on data to assist with the investment decision making process. A huge part of that is working backward from why we reject or proceed further when we first get a deck. The rationale is simple if we can know what gets us excited or what doesn’t from a finite data points we can then use this learning to proactively (and automatically) find companies that fit us as an entity. To do just that we went back and explored over 500 companies we have seen in the past 6 months to see if there are trends that emerge among companies we reject and companies we don’t. Without further a due here are the 26 most common reasons we reject companies.
We primarily look at 5 main aspects when evaluating a company, set exactly in that same order. Once we validated one aspect we move onto the next.
A.Internal Fund Strategy/Mandate
B.Product/Solution
C.Founders
D.Market
E. Business Model
Internal Fund Strategy/Mandate
- 1. Too Late
This is pretty simple and very straight forward. We missed the boat. We usually call for a moment of silence in the office, followed by playing Unbreak my heart by Tony Braxton then we usually proceed by replying to our Lunch: On messages and discussing what to have for lunch.
- 2. Too Early
70% of the time founders get passive aggressive when I inform them their company is too early for us.” I do understand the pushback but how founders/VCs/Angels define a stage. For us early stage is pretty straight forward, it’s “post product-market fit”….its even written on our website 🤓. It could take 2 weeks, 6 months, 2 years or infinity to get to that point. One thing for certain though is that 101% of the time this means that the company has already launched a product somewhere somehow.
If you are having
- 3. Outside Geographical Area
Every Fund/Angel Group/ Incubator/ Accelerator have a mandate which commonly includes geographical focus. It’s common that founders can’t make head or tail of it because everyone defines it very differently. Some view it as HQ of the company, others as the target market, others as a connection to certain origin other could even tie down to founders nationality. Best way to define a geographical focus of your potential investors is by checking their portfolio companies…
- 4. No value add from investors side (not strategic)
This is usually reserved for areas investors are:
- Not excited about your sector/market
- DK much about your sector/market
- Actually, have no value add to the company
- 5. Competitive Portfolio Company
No brainer. If an investor put money in a direct competitor, the decent thing to do is tell the potential company that a conflict of interest is present and pretend they never saw the pitch deck.ever.
- 6.
Note an area of Interest
Investors are humans too and your partners for the next 7-10 years. They work for their portfolio companies and so hence they are not excited about a certain sector or industry chances are they are not going to deploy money in it. Don’t take it personally
- 7. Raising ICO
That one is obviously circumstantial, different funds have different mandates. But where I work, we don’t put money in ICOs we do it all the old boring equity way.
Product/Solution
- 8. There is no (weak) comp adv
Comp Advs are one of the topics I am super interested in. I am writing a series on the different comp adv we have seen (spoiler alert it involves a lot more than AI and Blockchain). Usually, we see comp advs in a few different lights.
Offering a unique product that is hard to replicate
The startup has a crazy network effect (on the verge of kicking in)
Solving an old problem in a new way (i.e founders have some data nodes/learnings that suggest way people are approaching a certain problem is inherently wrong). These are very counterintuitive propositions and are #1 reason I have nightmares.
-Differentiating price point.
-Actual Tech IP
-First to Market &&&&&&& High Barriers to entry
-Niche focus (that is both big enough and ignored enough)
-Solving a new problem stemming from change/shift in consumer/client behavior
there are a few others also…
- 9
.Existing Company easily replicate
This one is tough. Because it also signals for a very clear exit opportunity. The investor needs to balance the opportunity cost very carefully here. - 10.No product/Market fit
In a region that the startup ecosystem is still very infant. Investors usually have trouble handing away money for first timeentreprueners with only a powerpoint deck. Over the coming years when more and more serial entrepreneurs start to emerge + more competition for deals, this ought to change - 11.Unclear Value Proposition
Whatever it is your company is doing, you need to be adding value for all parties involved(or at least the ones you monetize from). If you don’t bring them value, they won’t pay for your service and most likely you won’t get any (smart) investors.
- 12. No tech
SME vs Startup debate
- 13. Poorly Developed Product
Poorly developed product is very different from an MVP. MVP usually addresses the problem in the simplest way possible, that’s cool people love to give you money for that. A poorly developed product is usually a product that doesn’t solve those problems in the first place. This often happens when a bunch of engineers sit in a room with curtains closed, a shit ton of chips, mountains of Redbull and just assume they know everything that their customers want.
Talk to your customers!
- 14. Pre product
If you don’t have an MVP you don’t have a company.
Founders & Team
- 15. Missing Key People
It’s cool if you are building a saving app and never worked in a bank.
It’s not cool if you are building a procurement app and never worked in procurement.
*This is more common for industries that require extensive training and require a lot of technical expertise.
- 16. Poor Team/Founder Dynamic
At the end of the day, investors put money in great founders. If founders and the team are not on the same page, have a toxic relationship or any other behavior arises that raises red flags investors usually don’t proceed with the deal.
P.S This is #1 hidden agenda I have when meeting a company.
Market
- 17. Opportunity not big enough
To understand what “big enough” actually entails let’s go through some VC math. VCs bet one company in their portfolio being the “fund maker” with each investment as a potential candidate (otherwise its a waste of money and time). If a fund has $50M and they take 20% equity then they expect their stake(i.e the 20%) of each one of their investments to be potentially worth $50M. This means each company needs to be potentially worth $250M at least to be worthy of their risk.
If by acquiring 2-3% market share in your addressable market your company is worth $250M then it’s a potential opportunity otherwise “the opportunity is not big enough”
- 18. Too late to market
Imagine seeing a pitch today for a new ride-hailing company in the US because “the key is in the execution” 🙈.
Or someone opening a marketplace for DVDs…
- 19. Unfavorable Macroeconomics
If people are moving away from what you are trying to do. If the industry you are in is struggling or even shrinking. Investors look to make their money back in 7-10 years, it is hard to see a future when you can’t even see a present.
- 20. Crowded space.
Unfortunately, some problems have already been solved or are on the verge of being solved. Having another website building company (among the 200 companies trying to do the same thing) won’t do anyone any favors.
- 21. Unfavorable Reg trends.
This one has a very special MENA flavor. Given the market is composed of 20+ countries with each one (sometimes each city) having its own regulatory body. Some companies are just not feasible under the current regulations unless you figure out a way/strategy around it (then we are back in business 👋)
Business Model
- 22. Buying Market Share
When you don’t have a product market fit and think the solution to your problems is by throwing more marketing dollars at it.
- 23. Unsound unit economics
If your LTV/CAC is less than 3X.
- 24. Poor Go to Market Strategy.
The most exciting/rewarding/devastating thing for a founder is getting their first 10,20,50,100,1000,5000 customers. If the reaction of the investor to how you plan to get those very first customers is not “damn that’s smart” then there is still some work to be done on the go to market strategy!
P.S my favorites are companies that have some smartly implemented naughty solutions. Using things in a way that they weren’t meant to be used.
- 25. Not Scalable
Founders should do things that don’t scale but they should also (At least have a plan on) how to do things that do. If at the core of what you are trying there is not the way to achieve that sweet sweet hockey stick then it’s a no go.
If everything is working except for scalability though you might want to consider raising money from Venture debt funds/ Loans/P.E.
- 26. Not a venture opportunity
If the company can’t really grow to a 10X without spending 10X more then its usually it’s not a venture opportunity.