If you consider Market Size, Growth, Team, Traction, and Product as above the surface reasons for getting rejected by investors, then, what are some of the non-obvious reasons? A recent question on Quora got me thinking about these. Knowing them would help an entrepreneur better understand the nuances of decision making from an investor perspective?
Based on my experience, and my experience of interacting with fellow investors, here is a summary of what I believe are some of the non-obvious reasons. Of-course every investor has their own version of this, which forms a part of the due-diligence.
Also, what is non-obvious varies by person to person, so this is a broader list:
1) People Related
a. Founder and Team Chemistry, Culture – Investors watch out for co-founder chemistry, and any red-flags here. How do the non-co-founder team members work? Are they empowered? Do the founders understand their weakness and strength. Do they understand the critical success factors for the business? Has the team/founders done another startup before? How do they handle adversities? Given the team is a critical aspect, a lot of focus is paid on this.
b. Reference Checks – If reference checks for any individual co-founder shows some fundamental issue like integrity.
c. Coach ability – Is the founding team open to taking feedback? The founding team needs to have conviction, and own the final decision making, but are they open to critical points of views?
d. Litigation threat – Any litigation history of the founders. If this is a flag, depends on the type of litigation.
e. Single Founder – Some funds/investors as a general policy don’t want to invest in single founder teams.
f. City – This matters from talent/team perspective. If you are in a Hub City, it is easier to get good talent. Proximity to investors is a consideration. As long as the city is within 5-8 hours flight time, most people are fine with that.
2) Market
a. Competitive with Portfolio Company – Most investors make it a policy to check with their portfolio companies, if a given startup space would ever be on a conflict of interest path. Sometimes, the investors may not know on the outset, and may know after one or two meetings.
b. Burned before in the space –We probably believe what has happened in the past may happen again, or put in other words, we may want to learn from our experiences. As a result, if investors had a black sheep in a sector/sub-market, they may be shy of investing again.
3) Structure/Others
a. Cap Table Structure–
i. Is there substantial equity for founders/employees in the cap table.
Two variants of this
(1) Is there substantial “passive” equity in the cap-table? Cases where some founders have left with substantial equity, or promoters who have now become passive in a business, due to spin-off may have led to this situation.
(2) Was an early round very dilutive to the founders. A venture investor will likely calculate the cost it takes to build the business, and look at founder equity at the end of final expected round. Is that number in the ball-park to keep key employees motivated?
ii. Does the cap table contain lot of smaller investors, which may-not add value to the start-up. Typically a consideration during venture round, and may result
b. Partner can’t gather support at Partners meeting
i. The lead partner on the deal is not able to drive consensus internally. Internal fund dynamics can also play a role in this.
The bigger question is what you can do about this. It is advisable to work on whatever factors you could solve, before seeking funding. That being said, some of these are external factors, and being aware of the biases can save you some time in fund-raising.
[About Ravi Trivedi: Ravi works as a Principal at Southeast Interactive Technology Funds, a venture fund in North Carolina. He moved back to Bangalore recently, and is an angel investor in India based startups. Ravi co-authored the book Web Services Security, and participated in creating web services standards. Ravi has an MBA from Fuqua School of Business and has a Masters in Computer Science from Indian Institute of Science, Bangalore.]
