Why we didn’t invest in your company

[This post was written by Jitha, General Partner at OperatorVC our partner angel fund. It first appeared in his email newsletter.]

You have great early traction, and your initial customers are happy. But you’re having a hard time getting a second meeting with investors. Why?

Were you expecting this?

I was at a startup pitching event last weekend (curated by the amazing folks at NODD). There were a bunch of great startups there, with robust initial traction. We’ll speak to quite a few of them at OperatorVC.

But many didn’t make the cut. Despite the fact that their initial customers are happy. Why? I thought it would be useful to share the three main reasons seed-stage investors say NO to your startup.

• Not solving a deep enough need: If you’re not solving one of the top 3 problems for your customer, you’ll face retention challenges. Sure, you may become a Twitter (and leave egg on my face), but chances are, scaling will be difficult. I’ve written more about this before, in How to save yourself from a bad startup idea that looks good.
• Not a large enough market: This is a tricky one, because the best startups serve markets that are small now, but will become HUGE. But if your market (now / potential) will constrain you from becoming a $100 million business, it’s tough to say Yes.

You may become a solid cash flow generating business, but that’s not VC-scale. For a VC to be interested, you need to have the potential to hit a couple of hundred million dollars in value.

• Not defensible: Competition, per se, isn’t bad. But your solution needs to be defensible at scale — through brand strength, network effects, chain linked strategy, or something else. Which usually means that today, when you’re small, you can’t just be incrementally different (your peers aren’t stupid — they’ll copy you in a heartbeat). You need to be “10x better”.

Build. A. Moat.

In fact, defensibility creates the most value for founders. And investors:

“The most important thing to me is figuring out how big a moat there is around the business. What I love, of course, is a big castle and a big moat with piranhas and crocodiles.”- Warren E. Buffett

The articles below share a few more things to be mindful of, when building a startup:

1. How to save yourself from a bad startup idea that looks good
2. 11 reasons we didn’t invest in your startup
3. Lessons from saying NO to 1983 startups

PS. If you want to read such articles before anyone else, join Jitha’s newsletter here and subscribe to The Startup Weekly here.