Why are most startups not able to raise Series-A funding?
Most startups, even those who get angel funding or seed-stage funding or investments from accelerators/incubators, are unable to get follow-on funding. Why is Series-A funding so elusive? When Angel Investors invest in a startup, they do so after assessing whether the startup will be able to raise follow-on capital. That’s how they have a chance of getting an exit for their investments.
Why then, are startups not able to raise follow-on capital despite the mentoring and advice they receive from their angel investors or accelerators or incubators? At GHV Accelerator, we analyzed this problem and spoke to investors and startups to understand the reasons. And based on our conversations, we had some very interesting observations. Kindly note that these are reasons of decline by VC’s, even when they believed that the opportunity was large and the concept/product was exciting.
Reasons for startups to not get Series-A funding
(This is in no order or priority, but investors mentioned that they often see at least two of these reasons in angel-funded or accelerator-supported startups that they end up declining)
- The team has failed to build the skill-sets and competencies that are required to take the venture to the next level i.e. some skill sets are missing
- The venture has not done enough to demonstrate that there is a potential to grow i.e. whilst focusing on developing the product, the venture missed out on building traction as an evidence of the potential
- Lack of defensibility of the differentiator – often lack of IP or anything that can give the company a defensible, unfair advantage
- Lack of in-market validation of the product
- Interestingly, poor product or service was rarely a reason for decline
When we spoke to startups, we realized that most were totally unprepared to engage with VCs. Here is a checklist of what we think startups should be prepared with. Of course, there are a whole lot more things that they need to be ready with, but these are absolutely necessary for even getting follow-up meetings after the initial interaction with VCs - research their past investments, understand their perspectives and thoughts on the market, etc. This helps startups align their thoughts and conversations in line with the VC perspective.
- Understand their investment criteria – some may give more weightage to traction, some to the team, some to market sentiments, some to global opportunities while some may look for domestic focus, etc.
- Understand what they are looking for i.e. the kind of ventures they are seeking – some may be keen on product ventures while some may be open to a services business. Some may look at operationally intensive businesses, while some may not.
- What is the investment scenario – remember startups are ‘competing for capital’ with other startups, even those from completely different sectors than yours – and therefore, it is important to understand the investors view of your sector. (e.g. in the current environment, some VCs are shunning e-commerce ventures while some believe that there is still some potential in verticle spaces, and yet some others are keen to invest in ventures that support e-commerce e.g. logistics, analytics, etc.)
- Be clear on what you seek from the VCs beyond the money – clearly articulate how they may be able to add value - this helps them understand why this could be a relevant investment for them e.g. “You have investments in XYZ and ABC company. Clearly, there are synergies in what we do and two of your portfolio companies. Hence, we believe that your fund will be the ideal investor for us as it will help us leverage some synergies.”
Given that finding Series-A funding is such a challenge, we at GHV Accelerator, have organized a webinar on this subject on Friday, the 28th of November. Check the webinar details on - http://www.ghvaccelerator.com/unable-to-get-series-a-funding. You can register for the webinar here.