Startup funding has become an important topic in recent years. The media reports on the investments raised by companies, and the Slush event brings together thousands of investors and startups to meet each other every year. However, most entrepreneurs seeking investment funding do not even get to talk to investors. What makes startups who receive funding different from others?
Every month, Business Helsinki Accelerator receives startups that have failed in their efforts to get investors interested in their idea. Others have had a few investor contacts, but the most diligent have had time to approach even tens of private equity investors. It is understandable that an applicant for financing may then become frustrated and begin to doubt the functionality of the entire investment market. However, in this situation, it is good to pause for a moment and analyse why the financial taps are not opening.
Only a small percentage of startups receive funding
The first thing to remember is that only a fraction of all startups receives funding from investors. According to statistics from the Finnish Business Angels Network, only 4% of those that apply for funding through them receive an investment. Which means that 96 companies out of 100 will be left without it.
The share of those receiving investment from Venture Capital investors is even lower, with estimates generally being less than 1% of applicants. Although VC investors have begun to invest in early-stage companies as well in recent years, it is usually either an exceptionally experienced team or an exceptionally promising market.
Six of the most common reasons for not being funded
Too early stage is the most common reason investors are not interested. If a company’s product is still in the “idea stage” and the team has not tested their ideas with customers, it is very difficult for the investor to determine if the company would have a chance of success. The more evidence the team is able to show that customers are interested in their idea, the more likely they are to receive funding. Achieved monthly revenue or number of users in SaaS services are ways to convince investors.
A lack of team composition and commitment is another common reason for not getting a ranking. If there is only one person involved in the company, it is too great of a risk for the investor. Then, the advice is often to assemble a team for yourself and come back to it again. The fact that team members are working elsewhere is also a bad signal for investors.
Too small market is in some cases a barrier to accessing funding. If a small market puts a limit on a company’s potential for growth, the investor will not be able to get a sufficient return from their investment.
The lack of a scalable business model is something that is hard to ignore. For this reason, many ideas based on the work people do rarely raise funding. An easily scalable business attracts investor interest instead.
A poorly prepared investor presentation can also lead to a lack of funding. Surprisingly often, the material sent to investors does not provide a complete picture of the business. Sometimes the author of the presentation has assumed that investors already understand the problems in the industry or the needs of customers. Similarly, the fact that the business model remains unclear may leave investors uncertain.
Excessive valuation is a common reason especially for angel investors to ignore funding applications. If the value of an idea company is set at €10 million, many investors will move directly to the next case. There is a purely mathematical reason for this: if the total amount of angel investments were €200,000, it would only lead to a 2% ownership that would still be shared among several angel investors. In order for an investor to reap a return, the value of the company in the next round of financing should then be a multiple, say 50 million. Only a few startups can provide this growth.
Business Helsinki Accelerator helps with financial planning
Applying for funding requires careful preparation. The need for financing is often noticed too late, e.g. the new investment capital needs to be in the company’s account in a month’s time. It is worth taking at least 6-12 months to apply for an investment, depending on whether it is a seed phase investment or a subsequent funding round.
In Accelerator's programme, the preparing for funding package covers the planning of the financial path, the preparation of investor material and the identification of potential investors. We help the entrepreneur go through these steps so that the process of applying for funding is planned and managed.
