Any early stage VC fund will invest in less than 1% of the startups that they review, so as a startup founder don’t be disappointed if it doesn’t work out from the very first meeting. There are various reasons why an early stage VC fund decides not to invest in a startup at any given point in time.
However in order for startup founders to understand why fundraising doesn’t work out and what they can do with early stage VC’s feedback, I’ve put together the four most common rejection reasons that I’ve heard from both early stage VC’s and startups in the last six years and what these rejection reasons actually mean to you the startup founder.
Wrong stage: too late
An early stage VC typical investment ranges from pre-seed investments of 200K€ up to seed investments of up to 1M€. So if you are raising a Series A above that ticket size (>1M€), then an early stage VC’s is most likely too early stage an professional investor for you. Even though it is possible for an early stage VC to participate in a bigger round with a smaller ticket size, the ownership stake has to be large enough to make sense in terms of fund economics.
So if the early stage VC fund has a different stage focus or it’s simply too small for the round you’re raising, the only possible course of action for you as a startup founder is to approach other funds.
Wrong stage: too early
Even though early stage VC do pre-seed investments, startups are rejected based on the fact that they were too early. To put this statement in context what that means is that the early stage VC couldn’t get confident enough, based on your current traction, that you’re developing the next big thing.
In this case a startup founder should offer to keep early stage VC updated of the meaningful developments. A nice way of address this is by starting a regular email correspondence with potential investors and when you’ve made significant progress with the execution of your business strategy a.k.a. achieving the milestones, a startup founder can ask early stage VC’s whether they would be willing to resume fundraising discussions.
Meaningful progress means a significant growth in user numbers or revenues, an improvement in conversion and/or retention rates or even an amazing new addition to the team. Early stage VC’s will follow-up with startups if they’re interested, since they all have a strong FOMO from the next big thing.
Not a VC case
A lot of the times when early stage VC’s decides not to invest in a great startup is simply because they aren’t confident enough that this startup will be able to satisfy the growth requirements set by the fund economics.
You’ve probably heard about this before, but in order to guarantee returns for their LP’s, an early stage VC fund needs to find and invest in startups that have the potential to be “fund returners”, i.e. the proceeds that the fund receives from an exit scenario should cover the whole fund size.To give a simple example, for an early stage VC fund with 20M€ under management and assuming a 10% share in a startup, the exit proceeds from this investment should be at least 200M€ (10x).
Many times promising startups are active in industry verticals and markets which simply don’t position these companies for exits in this range (10x) or have founders that don’t seem to be willing to scale their companies in such a way that would make their startup a fund returner. In these cases, the founders might be building great business ventures, but early stage VC’s will not invest in them given that these startups do not fulfill their professional investment requirements.
Not reaching Product Market Fit (PMF)
Sometimes early stage VC’s are not convinced that your startup is on its way to hitting product market fit (PMF). Even though defining what is PMF is unique for each startup, since it differs by industry and business model and there is no single number that a startup must achieve to prove that it has reached it, the general definition of PMF is that you’ve found a solution to a problem that is so relevant to customers that they are willing to pay for it.
If an early stage VC doesn’t believe you’re there yet, it’s either because your startup is too early for an investment or because the early stage VC is not convinced by your current business strategy i.e. your team and your planned execution. Of course early stage VC’s are not always right and many times startup founders know their specific industry verticals or markets better than them.
But if you as a startup founder receive this feedback from more than one early stage VC then the advice is to go back to your paying customers and find out if the pain point that you’ve decided to solve is really big/ significant enough and if the solution you’re offering is really relieving the specific pain point. Then you should continue building your minimum viable product (MVP) that offers the minimum features to solve the specific pain point and constantly iterate on this .
Want to learn more on how-to-do, drop us an email and we will be happy to share our knowledge and insights with you!
Christos Lytras – Managing Partner