Top five reasons why startups fail to raise angel funding
Angel investors, among other things, usually prefer startups that have a rock-solid team that knows the market and has its skin in the game.
Today, in the startup world, angel investors are oft times compared to real angels, especially by startups. Why? Simply because angel investors help startups in the early times where institutional funding is rare. Let’s be honest, these guardian angels of startups all around the world often help bring several innovative ideas to life that would otherwise wither away due to the lack of financial assistance. Angel funding, being usually the first third-party validation of a startup, also acts as the most pivotal factor in a startup’s life.
Long story short, angel funding is crucial to the world of startups, particularly those who are still in their early stages.
There is no doubt that angel funding is of consequence in the context of startups, and yet a lot of people seeking investment fail to obtain funding for their ventures. One may be inclined to think this scenario is counter-productive to the entire cause. And it is. See, the thing is that many looking for angel funding aren't aware of what investors are looking for in not just the person or people who are pitching to them but also in the idea and the company before they make a commitment. Are all angel investors looking for just an exceptional idea? Or is it that the pitch should have been more effective? Could it be also from the startup's team and their collective personality? The truth is, there are different reasons and factors that angel investors rely on to evaluate the startup's scope.
And here are the top five reasons why startups are unable to secure funding from angel investors.
The number-one causative factor behind the failure to acquire angel funding is the team. To understand why you must be cognisant of the fact that early investments in a new venture rely extensively on the 'right' people to solve a problem. Team-Problem Fit is extremely critical. The company must also ensure that the team has the right complementary skills so as to make certain that they don't need external help that would slow the execution.
It is important to know that the market for the company's product or service is large enough or not. Getting this one right may seem like a no-brainer to a lot of people but the fact remains the founders of most startups get so caught up in trying to solve too small a problem that they fail to consider scalability in the market, which can prove to be a big issue even if their product or service is able to get it right. The market itself may put a ceiling to the growth of the startup and thus discourage angel investors. Another factor could be that the market is already too crowded or not ready for a startup to make a dent in acceptable costs.
Skin in the game
It is extremely important to give your venture your 100 percent. It is understandable that a vast majority of people who establish their own startups do not have financial security and thus want to have a monetary fall-back option i.e., a second job or a consulting assignment. Unfortunately, founders who moonlight and hope to jump into their startup full time once they receive funding almost never get funded. Thus, one must give the venture they're all. This also helps Angels to evaluate the commitment of founder and team to building the company.
During the early stages, the most critical of a lifetime of a startup, it is important to undertake a few experiments albeit with focus.
However, most startup founders get caught up trying to do too many things at once instead of concentrating on doing a just a few things right. It can't be stressed enough that diversifying into too many things in an attempt to project higher valuation to investors or a five-year-long plan will always hurt the startup's chances of acquiring funding.
More often than not, founders simply assume that the solution their venture offers is required without actually validating it with real customers. And a word of caution: friends and family buying your product or service or even media accolades and awards do not constitute proper validations. Founders must ask themselves: "Are there any real customers who have paid for the service or product that you are offering?" And, remember, intent to buy is not the same thing as buying.
These are the primary reasons why startups are unable to find the much-needed angel funding, though these are not the only reasons. Nonetheless, it would never hurt to check these points off your checklist before you set out to seek funding for your startup.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)