Why Hasn’t My Startup Been Funded?
There is no reason to think your inability to raise a round of investment is due to some kind of mystery.
By John Richards
This is a guest column written by John E. Richards. The views and opinions expressed are those of the author and do not imply endorsement by Beehive Startups.
John E. Richards is an entrepreneur, venture investor, executive manager, and educator. His activities have included founding, running, selling, and investing in several enterprises. He mentors entrepreneurs frequently. Recently, he was named Presidential Executive in Residence for Entrepreneurship by Utah Valley University. He served as Google Fiber’s Head of Operations as it landed in Provo, Utah. He spent over a decade teaching entrepreneurship at Brigham Young University in Provo, Utah where he also helped bring the Rollins Center for Entrepreneurship & Technology to global prominence. He was managing partner of UtahAngels, a venture investing group. He co-founded BoomStartup, a tech accelerator in Utah, and also founded the Utah Student 25. Early in his career, he was president of a publishing company in Seattle, Washington and later started the first-ever online yellow pages that led to an initial public offering and a multi-billion-dollar valuation as part of InfoSpace, Inc. John is a frequent speaker at conferences and other events. He and his family reside in Provo, Utah.
A frequent question I am asked by the founders of startup and emerging ventures is:
“Why hasn’t my company been funded? I feel that I have validated my business model through various rounds of validation and I still can’t get investors to write me a check.”
I recently was asked this over a pleasant lunch with the founding team of a venture that has been through a seed accelerator and has had several months to percolate. I answered the question with my Big Idea-Traction Scale. This is a concept I have developed in my own thinking to help these entrepreneurs understand why they are not achieving their goal of raising a decent round of investment from venture investors.
There are some logical and general rules that the venture funding market follows, even though there are definitely exceptions to every rule and serendipitous investors can show up at any time. I ignore serendipity and explain why some companies have a harder time than others.
Most investors are lemmings and follow others. There are few leaders. This means that the deals that get funded are those that can demonstrate both a “big idea” and “traction.” If they fail to convince investors of these two critical considerations, fundraising will be much more difficult. An entrepreneur is often focused on his product. He should be focused instead on having a game-changing “big idea” and getting real traction.
A “big idea” is more than just a large total addressable market. A big idea is a game-changing product or productized service that make a fundamental change in a vertical, even if small, or one that creates a new vertical. Great volumes of people or companies find the problem to be significant and the solution viable — and they are willing to pay for the solution and they want it now. That’s a big idea.
Traction is trailing month-over-month increases in users, customers, and/or revenues. There may be other key performance indicators, but these are the significant ones that investors like to see. It doesn’t have to be huge numbers either. If the last three months have GAAP (generally accepted accounting principles) revenue of $5,000, $10,000, and $25,000 in succession, then that is very attractive. Make the numbers larger or more pronounced in month-over-month growth, and investors salivate.
The implication for entrepreneurs is that at the outset, the problem/solution set or the idea or the original business model hypothesis — whatever you want to call the beginning of the entrepreneurial process — should begin with a big idea and then, after validation, get real traction as soon as possible. Pursing a small idea or continuing to try to raise money without real traction usually frustrates everyone in the ecosystem.
There is no reason to think your inability to raise a round of investment is due to some kind of mystery. If you don’t have a big idea and you don’t have traction, it ain’t gonna happen absent a white knight investor who is ignoring good venture investing practices.
Published 3/20/2015
