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“NO.”
This little word can be the most heartbreaking thing to hear for entrepreneurs desperately seeking funding for their dream business. Unfortunately, most entrepreneurs will hear “no” a lot. According to a study published in Harvard Business Review, only 1% of meetings with potential investors turn into a partnership.
While it’s been difficult to hear investors reject my pitches as an entrepreneur, I find it equally difficult to reject budding startups now that I’m on the other end of the spectrum. Fortunately, my years of experience in both capacities have helped me better understand the minds of investors. That’s why I want to share seven reasons why investors might reject your business proposal.
Related: Venture Capital 101: A Complete Guide for Startups Seeking Investment
1. Your numbers don’t match
Part of meeting with potential investors is sharing the raw numbers of your business. For some this isn’t a problem, while others feel some trepidation and might even consider making things sound better than they are. It may have been an honest mistake. In any case, venture capitalists are experts and will always spot inconsistencies, especially when performing due diligence, which they will.
If they find that the numbers you presented are not accurate, they will call you. Integrity and competence are vital to strong business partnerships, and a failure in either area could jeopardize your reputation.
2. Poor consumer perception
This may seem obvious, but if your target audience doesn’t buy what you sell, investors won’t either. Even if your sales numbers are sizable, if your customers are unhappy with your product or service or there is a constant theme of discontent, this is a clear signal to walk away from the table.
Venture capitalists need to know that you are doing everything you can to ensure that customers are happy and cared for. Not only are happy consumers more likely to remain loyal to your company if they are happy, but they are also more likely to share your product or service with others.
3. Your company lacks diversity
Culture matters. It’s what drives good organizations to become better. A crucial part of developing a strong culture is welcoming and hiring people from diverse backgrounds with different perspectives. This is how innovation thrives.
A lack of diversity in your company now could tell investors that building a diverse culture will become a problem as the organization grows later. A word of warning: Don’t try to hit any “quotas.” It should come from a genuine desire to expand your horizons and create positive change for your company and your industry.
Related: Serial Entrepreneur Turned VC Reveals 4 Numbers You Need to Know to Grow Your Business
4. You seem difficult to work with
Even if they believe in your business, most venture capitalists won’t simply hand you a check and pat you on the back. No, it’s more about forming a lasting partnership to ensure the long-term success of the company.
This means that despite the company you have built, you are still open to new ideas or suggestions to improve it. Investors know what works and what doesn’t and they want to pass it on, but only to someone willing to listen. If you present yourself as an entrepreneur who has to do everything your way, you will have a difficult time finding willing suitors.
5. Your business won’t stand out
You can have a solid business model with a quality product or service, but your company will blend in with the rest if nothing differentiates you from what already exists. In a market likely saturated with similar ideas, investors want to see something that makes your idea stand out. How is what you offer innovative compared to what currently exists? If it’s not, they won’t be interested.
Successful entrepreneurs know their market and customer base intimately. They have done extensive research into what others are doing so they can offer something special.
6. You are unprepared
Just having a meeting with venture capitalists is a feat in itself. With hundreds of pitches and proposals coming their way, their time is a limited resource. There are no second chances.
If an investor’s question takes you by surprise or you don’t have a satisfactory answer ready, you are unlikely to gain their trust and support. I know you’ll probably put in 20 hours a day just to keep your dream alive, but you can’t afford to be absent when you have a chance like this.
It’s a lot of pressure to be under, but it’s also a great opportunity to show investors that you can handle it. Despite everything you’re going through, being prepared for every possible scenario or challenge speaks volumes about your ability to run a successful business.
Related: Embrace Change or Lose Money: 5 Trends to Know in Venture Capital This Year
7. It’s just not a good solution
Rejection isn’t always something wrong with your business. Sometimes investors say no because your company doesn’t fit well into their investment portfolio. Every venture capitalist has a specific investment strategy that they adhere to. That’s how they became successful in the first place. They will occasionally take a chance on a business idea outside their scope, but only if they feel confident that it is an opportunity not to be missed.
For some, it may be less about the industry or market and more about the growth stage of your company. Regardless, study the investors and companies you meet with. What is their typical profile? Which markets do they usually target? Do they tend to invest more in Series A funding or other rounds? Like any other interview, you need to know who you’re talking to and have questions ready.
These are just a few examples of why you may not get the support you are hoping for from investors. It can depend on countless factors, some within your control and some not. The best advice I can give you is to use every rejection – every “no” – as fuel to improve your business, your product, and yourself until you find that “yes” you’re looking for.