Over the years, I’ve spoken with a quite a few startup founders. Many of them are smart, likable and have really great ideas that they’re able to convey in a pitch deck. Yet many of them struggle to get funded. Why is it so hard to get a term sheet?
If everything seems to be going well, but you’re not getting the traction you think you need for your fundraise, it’s probably because you’ve run into one of these three problems.
The market is too small
There are a number of incredibly cool products that just don’t have a market that’s big enough for general adoption. For example, it’s possible that you are building an accessory that makes crop-dusting fields 30% more efficient. On the surface, this may seem like a good product in a great market. The people who want to buy your product are excited about it, and you make sales pretty easily.
The problem, however: There are only so many crop-dusting planes in the world, which means that once you’ve reached market saturation — that is, every crop-dusting plane in the world is using your product — you are unlikely to make additional sales.
Crop dusting is obviously niche, but there are less obvious examples, too.
I recently spoke with a founder who had a really elegant solution for how to help people optimize their meal planning so the produce in the fridge that goes bad the soonest gets eaten first. On the surface, it’s an important problem: Reducing food waste is objectively good. The founders had spoken to a lot of potential customers, and everybody agreed — food waste is a problem, and they would love to have a solution. The pitfall was that the startup hadn’t asked its customers what they were willing to pay for the product. It turns out that this was a $100 piece of hardware, and that was the problem: The Venn diagram showing people who care enough about the problem to spend $100 on a piece of equipment to fix it and didn’t just throw the food out and buy new food when it went bad turned out to be almost nonexistent.
How to fix this: Often, the solution may be to iterate on the business model. For the crop-duster example, could the technology be applied to other applications, in other markets, for other needs? For the fresh food company, would there be a way to fix the same problem in a different way, with less — or less expensive — technology? Could it partner with a fridge manufacturer and get the tech installed by default?
The team is not good enough
It is hard to overstate how many great startup ideas are hindered by teams that aren’t good enough.
To be clear, that doesn’t mean the team is stupid, inexperienced, or lacks the technical know-how to build a company. The issue is that the world of startups is painfully, insanely competitive.
A truism, perhaps, but as Victor Hugo put it, “Nothing else in the world is so powerful as an idea whose time has come.” That is true for startups, too: Whenever there’s an innovation that’s available through the current generation of technology, and has a big, beefy market worth disrupting, it probably means that you aren’t the only team investing time and resources in solving it. That also means that other teams working on this are approaching the solution from slightly different angles and will have strengths and weaknesses that are different from your team’s.
The phrase that is often used here is “founder-market fit.” As a founding team, are you part of the company’s moat? And if so, how deep and wide is that moat?
There are lots of different ways that “founder-market fit” can show up. Some questions you could ask yourself:
- Have I been part of a corporate in this space before?
- Do I have a list of all the potential clients in this space?
- Am I a micro-celebrity in this space?
- Do I have a patent, or deep experience that nobody else has, related to this space?
- Have I built a startup in an adjacent space in the past?
I often see very smart people with deep experience trying to solve problems they don’t fully understand. I’m guilty of this myself: I saw a huge opportunity in a huge market and decided to barge in and try to solve the problem. We built what I still believe is one of the best products in this space, but without knowing the movers and shakers in the market, and without truly grokking the market dynamics, I had misidentified what the challenges would be when building a company in the end-of-life healthcare space. We had extraordinary advisers and a lot of tail winds, but it wasn’t enough to get the solution across the finish line. We never succeeded in finding a business model that made sense.
Another way to think about it: For every dog-walking app on the blockchain a startup investor sees, they probably see three to four of them. The main differentiator is going to be the team. What is it about this team that makes it a perfect fit and worth backing with an investment?
How to fix this: It takes a lot of self-reflection to be able to identify your strengths and weaknesses. If your founding team doesn’t have an unfair advantage, it’s hard to resolve; only extraordinary traction can make up for a lacking founder-market fit. So the solution becomes, How can you show extraordinary traction? And if you can’t do that, can you bring in a team member who does somehow give you that unbeatable leg up over your competitors?
The plan doesn’t make sense
The final major pitfall I see in a startup’s story is a plan that doesn’t make sense. The company may have great founder-market fit, it may have found a huge problem worth solving in a market that is dying for a solution and itching to spend money, but there is little connection between the vision the founders see for the future and their path to get there.
One way this may show up: Say your projection shows that you are raising $5 million, you are hiring a salesperson, and suddenly, your sales increase 100x overnight. That isn’t how sales works. Another example is an operating plan that shows a company starting to grow 20x, but the increase in spend on marketing is only 2x. You’d need to explain and show how those hard-to-believe numbers can be true.
Building a startup takes time. You have to hire and train a staff, which could take weeks or even months. As a startup founder, you own the vision and the steps toward making that vision a reality. Of course, investors want startups to grow rapidly, but don’t set unrealistic expectations.
The truth is that no plan is perfect, and that’s OK. But as a founder, you will be evaluated on your ability to make a good plan for your company. If your plan is literally impossible, you won’t come across as a high-quality founder. That can be enough for an investor to pass.
How to fix this: Sense-check every plan, and question your assumptions. If you predict that something will change, does it change in a way that is reactive to other parts of the plan? Does it seem plausible? Get a friend to pressure test your plans so you can see how well you’re able to defend them. If something seems too absurd, it probably is. Be ambitious, sure, but don’t bend the laws of physics to your will.