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5 reasons why your start-up is not making money

By Amit Singh
November 20, 2015 11:15 IST
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Read on to learn how you can get funding for your business!

There's this guy.

He left his seven figure salary job to pursue a start-up and has spent the last three years trying to build it.

He approaches VCs and angels every quarter but gets rejected every time.

He is running out of the loan he took from friends and family.

Should he call it quits now?

Should he still try to run it?

Story sounds familiar?

Are you in a similar situation?

Are you not getting funded?

What could possibly be the reason?

There could be five possible reasons why you are not getting funded despite best efforts:

1. You
2. Your start-up
3. VCs
4. Market
5. Your luck

Let's go through them one by one, and see what can be done about each of them.

Reason #1: You

Possible reasons that "you" might be the reason your start-up is not getting funded:

You are inexperienced

Are you Jon Snow in the Game of Funds?

Solutions

  • Get domain experience by working as an employee at a start-up in a similar space.
  • Get a degree in the respective field.
  • Keep on working on your current start-up for years, until you become an expert.

Your pedigree is not conventionally considered the best

In other words, you didn't go to the IIT/IIMs.

Even though a good pedigree does give you several advantage in terms of exposure and network, there is no real reason why your non-Ivy League start-up cannot succeed.

There are tons of examples of funded start-ups, which are not run by IIT or IIM grads (and similarly, tons of unfunded start-ups by IIT/IIM grads).

This can't really be the only reason your start-up is not getting funded.

Find out what other reasons might be holding you down.

You started up for the wrong reasons

  • Were you compelled by a particular personal pain-point?
  • Was starting a company the best way to solve it?
  • Did you start a company to become rich or just because you hate your job?

If you do figure out that, you started a start-up for the wrong reasons. Shut it down now.

There is no point in wasting so many of your crucial years doing something you are not meant to do.

You are bad at communicating your story

Solution

  • Get clarity on why you started this company and why you are the best person to do it.
  • What is the vision that drives your company forward? Don't just use jargon. Mean it.
  • Practice a lot.

Reason #2: Your start-up

Possible reasons for that include:

  • Your start-up is not really a start-up. It's just an idea/b-plan.
  • It's very easy for investors to figure out if you have done any real work or not. Get at least proof of concept (and your LaunchRock landing page doesn't count).

You are not solving a true pain-point

There is not much that can be done about it. Only solution is to try another venture, which actually does solve a real problem, ideally a personal one.

Hopefully, this time which solves a real pain-point.

Your team is incomplete

Are you building a pure-play tech product and have outsourced the product development?

For some businesses it's okay to not have a CTO to begin with, but for some it is essential to have in-house tech expertise from day one.

Another version of incomplete team is, if the founders have met just for the sake of start-up at a conference/event and don't really have a mutual history.

The chances of founder's dispute increases in such start-ups, and VCs might take that as a negative factor. Figure out if you have a complete team. If not, get one first.

Team is not full-time

Are you still working on your daytime job and are waiting for VC money to kick in before you call it quits?

How do you expect VCs to have confidence on your idea, when you yourself don't have the faith in your capability to execute it?

You are doing things that don't EVER scale

It is okay to follow Paul Graham's advice, but also remember that you will eventually need to scale, and for that you need to be present in a market that allows for that scale.

You are asset-heavy

This doesn't necessarily mean that your start-up is non-fundable. However, VCs normally tend to hate asset-heavy models. This might be one of the reasons VCs keep saying no to you.

If you still believe that asset-heavy is the correct model for the venture, go ahead with it.

Create value for your customers. VCs will eventually follow.

In contrast, if you also have doubts, try an asset-light model.

Your traction is low and steady

Solution: Figure out a model that gives you true product-market fit. Until then, keep on experimenting.

You are trying to do everything for everybody

Remember. You can do anything, but not everything.

Solution: Focus on one use case and a clear strategy to nail that one, and then go ahead with other use cases or geographies.

Reason #3: Venture Capitalists

These might be scenarios where VCs fail to see value in your start-up.

Don't always be disheartened. There might be a healthy chance that they see value in your start-up after you have proven it out.

Opportunistic VCs

VCs generally do tend to be opportunistic in the kind of investments they make.

They might be willing to put in money in proven models, which have worked in US or China, but will refuse to fund your truly innovative idea.

Mismatch between your company and VC's expectations

In VC firms, top 2 per cent of the companies generate 98 per cent of the wealth. So VCs are looking for opportunities that generate 10x or 20x returns.

Yours might be good business to run, but might have the capability to return just 3x or 4x. That's not necessarily bad.

It just means that VC money might not be the smartest money for you.

The key here is to believe in yourself and your company.

There is nothing much you can do if VCs fail to see value in your futuristic product. Timing is a critical factor in the success of your company.

Just keep on executing, and eventually VCs will come chasing you.

After all, you don't need the whole VC world to put money in you, you need the very few ones who truly share your vision.

Reason #4: Market

This can be interpreted in multiple aspects:

Slow market

Fund raising for start-ups has generally become difficult because of slowing down of the market.

If this is the case, there is literally nothing you can do, apart from cutting your burn, and hoping to let the cycle pass.

Difficult sector

The market or sector in which your start-up operates might as well be a difficult sector in itself to raise funds.

Be it long sales cycles, wafer thin margins or high customisation, all contribute to the sector being very difficult to operate in.

For example, if you are an inexperienced education start-up who sells to schools, VCs normally would say No.

Being in a difficult sector dramatically hampers your chances of getting funded.

The VCs generally fund opportunities that exist in large markets that have the potential to return huge multiples.

Crowded market

Your start-up's sector is already crowded with multiple funded players and VCs don't see a clear differentiator between you and them.

Reason #5: Your luck

If you think all the above don't apply to you and its just that your luck is bad. Just keep on trying and make you own luck.

Yes. There always is a chance.

A few ways to make your own luck:

Be social

According to psychologist Wiseman, the number of "lucky breaks" one gets is a factor of how social and interconnected they were with those around them.

Do stupid stuff

Experiment a lot. Perception of luck is more likely to fall on those who take a few dumb risks.

Maximise return on luck

What sets the successful companies apart from the others is that they maximise their positive luck and minimise their negative luck.

They get, what Mark Manson calls, high 'Return On Luck'.

There is a huge possibility that if you keep on trying, you will get funding. That doesn't mean all you problems will end. You will still have problems, but funding won't be one.

Photograph: NoHoDamon/creative Commons

Amit Singh is part of the investment team at Kae Capital (an early stage VC firm).

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