Fundraising is a challenge when you reach your Series A round
According to Dealroom.co, only 20-30% of seeded companies go to Series-A.
This means that more than 70% of the companies will fail to fundraise that is much needed for growth and sustainability.
But what are the reasons why these startup founders fail to raise additional funding rounds?
Why are most startups unable to raise follow-on capital despite the mentoring and advice they receive from their angel investors, accelerators, or incubators that they have joined?
Here are the top 5 reasons why startups fail to raise additional funding
1. Team Skill Set Missing
The team has failed to build the skill sets and competencies required to take the venture to the next level.
This makes your investors weary if you have the right leadership skills to build a team and grow it into a unit that scales and multiples investor financing.
2. No Traction Build-up
The venture has not done enough to demonstrate that there is a potential to grow i.e. whilst focusing on developing the product, the venture missed out on building traction as evidence of the potential
3. Poor KPIs
Investors are curious about the KPIs you’ve produced following their funding.
To be eligible for additional rounds, a startup needs to hit those KPIs. E.g. a simple KPI can be MRR of $5,000 and failing to hit those KPIs may result in a lack of investor interest.
4. Entry of Strong Competitor and Lack of Differentiation
There’s always a risk of competition. However, entry of a strong competitor coupled with a lack of differentiating factor e.g. lack of IP or anything that can give the company a defensible, unfair advantage, are reasons why most investors will feel reluctant to further finance your business.
5. Lack of in-market validation of the product
Chances are that your customers don’t love the product you have created.
The product seemed to be good at seed round. However, customer feedback and reviews may suggest otherwise.
This can be critically evaluated by your investors before they hand you additional financing.
To improve your chances of fundraising here is a checklist of the top 4 things startup founders should be prepared with.
- Understand their investment criteria – some may give more weightage to traction, some to the team, some to market sentiments, some to global opportunities, while some may look for domestic focus, etc.
- What is the investment scenario – remember, startups are ‘competing for capital’ with other startups, even those from completely different sectors than yours – and therefore, it is important to understand the investor’s view of your sector. (e.g. in the current environment, some VCs are shunning e-commerce ventures while some believe there is still some potential in verticle spaces, yet others are keen to invest in ventures that support e-commerce e.g. logistics, analytics, etc.)
- Be clear on what you seek from the VCs beyond the money – clearly articulate how they may be able to add value – this helps them understand why this could be a relevant investment for them e.g. “You have investments in XYZ and ABC company. There are synergies between what we do and two of your portfolio companies. Hence, we believe that your fund will be the ideal investor for us as it will help us leverage some synergies.”
- Perfect your investor documents – Your investor deck should clearly state the progress you have made since seed round and should be narrative so that the investors can see your work and what you plan to do with an additional round of funding. Consider having an expert who can help you craft the right deck and documents necessary to win over your investors.
Given that finding Series-A funding is challenging, Stellar Consultancy has been helping various startups become investor-ready and strategically raise funds from investors. If you’re looking for a team of experts who can prepare investor documents along with coaching you to position appropriately for the funding, then feel free to reach out to me or send over an email at firstname.lastname@example.org