Obtaining funding is a significant challenge for many businesses. This is especially true for startups seeking venture capital (VC). According to data from Fundable, a mere 0.05% of startups are funded solely by VC firms. Similarly, investment firm Unreasonable estimates that the odds of a startup being funded by either an angel investor or a VC is around 3%.
If your business is planning to raise a round of capital, it's easy to see these numbers and get discouraged. It's extremely unlikely that your startup will get funded right away, and many successful startups faced hundreds of rejections before hearing "yes" from a VC. Even Airbnb couldn't get an investor on its first try.
With all of this in mind, it's wise to prepare for the reality that you might be turned down by the VC firms you pitch. To help you understand why a VC might decline to invest in your business, here are a few common reasons why VCs reject a startup.
[Read: What's Your Biggest Challenge? Entrepreneurs Say: It's Financing]
Reasons your startup might be rejected
There are countless reasons why VCs will turn down a startup, and not all of them have to do with your specific business. While investors may decline opportunities because of concerns about your business plan, founding team or market traction, they may also reject "good" startups for any of these market-related reasons:
Bad timing
Being too early or too late to market are both valid reasons for VCs to pass on an investment opportunity. As former venture capitalist Robert Carroll explains, "Trends come and go, and so do investment opportunities," so if you're behind the curve, you're unlikely to get funded. On the flip side, unproven ideas that are the first of its kind are often seen as too risky.
Steep competition
The number of other successful players in your industry could impact your startup's chances of getting funded. According to VC and angel investor Sarah Downey, VCs might turn down a startup that's trying to enter an overly crowded space, or one with an established competitor that could easily do the same thing. Carroll also noted that investors may also have to reject an otherwise great startup because they already have a competing company in their portfolio.
Lack of potential
As Downey points out, VCs strive for "10-fold, 100-fold or even 1,000-fold returns." Your startup may become successful and sustainable in a regional market, but if an investor doesn't see it scaling to the point of massive ROI, you likely won't get funded.
There are countless reasons why VCs will turn down a startup, and not all of them have to do with your specific business.
How to respond to a VC rejection
A rejection from a VC firm is not the end of the road, nor does it mean you'll never get funded in the future. In fact, if the VC takes the time to explain why they declined to invest, you can take those lessons into your next investor pitch.
That's why startup advisor and entrepreneur Patrick Henry recommends asking for specific feedback when a VC rejects you. Henry writes that gathering this information can help you spot flaws in your business model and tweak your product positioning to be more solid and appealing.
Similarly, Mark Suster, a VC managing partner, says that being persistent and following up with a potential investor — especially one who's been vague or non-responsive — can give you a better idea of where you stand.
"Founders often don't push hard enough in asking for more meetings, asking where they stand [and] asking what the next steps are," Suster wrote in an Inc. article.
While you shouldn't give up after a few consecutive rejections, you may reach a point where you're ready to look for alternative methods of financing your business. Whether you borrow money from friends and family, self-fund, crowdfund or apply for a business loan, there are plenty of other ways to raise the money you need to get off the ground. To explore your options, visit CO—'s guide to funding your small business.
[Read: Everything You Need to Know to Prepare to Apply for a Business Loan]
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
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