Who hasn't heard the success stories about startups that have secured millions in funding? But that's just the tip of the iceberg, as VC analyst David Stuck tells us: of the up to 1.000 startups that apply for VC investment each year get just 1% funded. Find out what happens to the remaining 99%, how to deal with rejections as a founder, and David's tips for negotiating with VC investors in this guest post. Finding the right investor for your company is not that easy. Why 99% of startups turn down VCs is explained by David Stuck in this guest post. A clear word in advance: This is not about the dazzling topics of the colorful start-up world, but about investment rejections and financing rounds that could only be closed in the second or third attempt. What start-up is willing to admit that?? And which VC investor boasts about an investment in a start-up whose development did not suffice for funding in the first attempt or which has already been rejected (several times) by other VCs?? But this is no wonder, because the probability of a VC investment is less than 1%. (Tens of) thousands of start-ups fight every year for an investment at the more than 100 German venture capital companies. An (early-stage) investor usually makes between 10 to 20 investments per year and rarely sees less than 1.000 Pitch Decks.
In the screening process, 99% of the possible deals are sorted out by the investor. As a founder in fundraising you are always fighting against this 99%!
Before applying: check your profile
The investment process is similar at most VC firms. The first step is to filter out the ideas that do not fit the profile of the VC company. Often, investors have fixed parameters that must be met, such as.B. Specific industries, financing phases (ticket sizes) or regions. Others invest exclusively in B2B or B2C business models, SaaS (Software as a Service), marketplaces, etc. Such a rejection is not a statement about the quality of the startup (which has not even been tested at this point). That's why you should continue to "apply" confidently to a (suitable) investor – although the word apply is no longer appropriate, as nowadays VC firms also compete for good startups. Consequently, start-ups that have already been cancelled end up as a new deal with a second, third or fourth investor, without their quality necessarily being poor.
Tip: Better to inform in advance about the fixed criteria of an investor and easily avoid this kind of rejection. As a rule, the relevant information can be found on the website of the respective investor. Even if this kind of rejection is not based on content, you should not strain your motivation too much.
If the investor has concrete questions about the pitch (deck) or invites directly to a phone appointment, the start-up is one round further. At the latest now it is about content: Business model, strategy, technology, market, traction, team and funding round. Through years of expertise, an extensive network and a broad market overview, the investment team of the VC firm can quickly address the "crucial points" of a start-up and come to an initial assessment. If this is predominantly positive, the next step is a face-to-face meeting between start-up and investor.
Much more often – namely in 85% of the cases – it comes at this point, however, to a rejection!
Clear rejections: no means no
For 90% of the cancelled start-ups, one or more points did not fit: Investment case too small, market too small, business model not suitable, doubts about the team, product not convincing.
Tip: No means no – this also applies in the start-up-VC relationship.
Avoid unnecessary lecturing of the VC, because the VC has thought through his decision long and hard. The start-up scene in Germany is relatively small and VCs well connected, so the following applies:
First Impressions Count, but Last Impressions Count More.
If you get the same feedback and the same reasons for rejection from several investors again and again, you should (at some point) draw your conclusions. As good entrepreneurs, don't waste time and energy discussing criticisms from VCs, but validate your business model!
A second chance for start-ups on the "watch list
- Market needs to be rethought (z.B. (too small) – Vertical/application case to be changed – Adjust market entry strategy – Prepare competitor analysis
- Revise/image sales pipeline – bundle leads cost-effectively(er)
- Identify marketing channels and test with budgets
- Obtain qualified letters of intent (LOIs)
- Finalize product – Demonstrate prototypes – Onboard beta customers
- Identify and build relevant Key Performance Indicators (KPIs) – Validate/adjust pricing
- Set up metrics: CAC, CLV, Gross Margin- Revise financial planning – Optimize conversion rate
- Strengthen team: find co-founder – add employees – introduce employee participation
- Bring tech expertise into the team
- Structure/clean up cap table – justify valuation idea
- And quite often: build more traction and show a proof-of-concept
Start-ups should be given a clear signal in the exchange with the VC whether it is a clear rejection or a parking on the "watch list". Even if rejections are no fun: VCs always have their reasons and analyze a lot before rejecting a case. By the way, professional investors do not reject start-ups only when asked, but send their rejections proactively and at eye level.
Back to the "watch list": a VC investment in a startup requires mutual trust. The "watchlist" approach is used to build this trust.
The founder's goal now is to make the investor a super-fan of his own start-up. Therefore, homework should be accompanied by regular personally addressed updates and status notifications to keep the investor involved in the company's development and to stay in mind.
VCs monitor the development and assess the right timing for an investment. As long as founders have not received a clear rejection, they have the chance to convince and move one step further towards investment.
The next step is an invitation to a personal meeting. Here applies: "The stage is yours", because now also the partners of the VC company enter and all deal intensively with the investment case. Now, at the latest, there is also a targeted search for "dramatic" errors, so-called red flags and deal breakers. After the first assessment of the "hard facts", the meeting is also the first to discuss the personality of the entrepreneurs – one of the most frequent reasons for rejection, even though (of course) no one talks about it openly and this reason is communicated only indirectly.
If a single VC doubts that his investment will be sufficient until an important milestone is reached or until the start-up is profitable on its own, and if a necessary co-investor for the investment case cannot be easily found at the moment, a rejection also often occurs at this point. Start-ups should then collect seed money through business angels or directly get several VCs together at one table.
If all open points have been discussed and both parties still have a good feeling, term sheet negotiation and due diligence will follow. The VC must also trust the startup at these stages.
Only if the investor is convinced that you are capable of building a fast-growing and sustainably profitable company that performs better than 99% of all other teams will they invest in you!
Quite apart from the fact that the investor is naturally aiming for an exit and would like to see his investment in your start-up doubled or, better still, twenty times over. The further the investment process progresses, the more concrete feedback a start-up can expect. Valuable knowledge for the further development of the company!
Do not forget: Only when the ink is dry on the notarization of the capital increase, you too will be among the 1% of startups that have secured VC capital.