You know you’ve got a strong business idea which you foresee has a huge financial potentials. You believe that there’s a ready market who needs your product or service. From all accounts, you are convinced that your business will be a success, and even become the next big thing! All you need is capital, and investors who are willing to support your vision and convert it to reality.
Yet after looking far and wide for potential investors, all you get are rejection letters. The banks, venture capitalists and angel investors all said “No” to your proposal. You are unable to convince them of the viability of your business. Here you are, with the “perfect” business plan, and yet no one wants to support your idea.
Here are 10 common reasons why investors say “No” to a business proposal:
1. Failure to Present Strong Total Picture.
Some entrepreneurs focus solely on their financial projections. They approach investors with the mistaken assumption that these capitalists are only interested in how much money the business can make. Well, that’s true; but investors will not look solely at your numbers. Instead, they will look at the totality of your business: how the entire business will work, how well are you prepared to run it, and whether potential problems are surmountable.
Investors know that they can only make money if production, marketing, and distribution are done properly. Some even require entrepreneurs to conduct some sort of market testing to determine potentially costly problems and correct them as soon as possible.
To avoid this problem, your business plan must be well-thought out — from cover to cover leaving no weak spots that an investor may use to shoot down the entire plan.
2. Question of Sustainability.
When you talk to an investor, you will invariably present yourself as the “heart and soul” of the business. After all, this business is your vision. You are its prime mover, and you will be the one who will take it from an idea into reality.
Investors, however, look beyond having you in the business, and expect you to do the same. They will want to see how you plan for the sustainability and continuity of the business, even though you are long gone. Will your business die if you leave it and pursue other interests? Will the business end with you? What about your key partners, if you have any?
Your business plan must demonstrate that the business can remain viable and continue to operate even after the founders (and you) have left the endeavor.
3. Unwillingness to Share Control.
When looking for investors, you will run into two kinds: those willing to support you in the background as a “silent partner;” and those who would want to have hands-on control in the business. The latter type of investors may ask for equity, a seat in the board, and management control in exchange for the capital they will provide. They like your idea, but they may either feel that you do not have what it takes to make this business a success; or they simply want to make sure that their interests are well taken care of.
How willing are you to give up ownership and/or control of the business? There are entrepreneurs who cannot face the prospect of sharing equity and control to another person, no matter if this person has the finances to turn the business into reality. If an investor sees your reluctance to share control of the business, then it may be time for you to seek out other means to finance the business.
4. Underestimation of Start-Up Costs.
One fatal mistake you can make is to underestimate the capital that you need. This is the common reason why many small businesses fail. It may be due to your failure to accurately determine the costs of the business due to wrong assumptions and poor cost estimates. Or you may have failed to take into account the changes in business environment. However, you may also be deliberately attempting to show to the investor that more can be done with less money.
Whatever the reason, an investor who finds that you underestimated the start-up costs of your business may not be too willing to support you. In the investor’s mind, you lack the business sense to make your idea a success. You don’t even have a concrete understanding of how much your business will need! Drawing a false picture of the true cost of the business can be a point against you.
5. Pumped Up Revenue Projections.
On the other side of the spectrum, you may be too enthusiastic about your business that you overestimate your revenue projections. Most funding sources, particularly if you are dealing with venture capitalists and institutional lenders, are experienced financial analysts (or have access to one) and you can expect them to thoroughly check your financial projections. They will be able to tell if you have a firm understanding of your business and know what you are doing.
Even if the investor accepts your revenue estimates and agrees to give you the capital, you will be running into the danger of the business failing to live up to the financial expectations of your investors (and yourself). Generating less-than-expected revenue can bring frustration to your financial backers, and can lead to conflicts.
6. Lack of Know-How in the Business.
An investor needs to be convinced that you have sufficient knowledge and understanding of both the business and the broader industry. They want a person who has both the technical, marketing and management skills to steer the business. In fact, if you lack the proper breadth of management and business experience, your chances of securing funding is nil.
Investors want to be sure that you have what it takes to run the business. Sure, you may have thought of the idea, but if you do not have the business smarts and financial sense to make it a success, they would pass up on your project. They need someone who has adequate exposure in the business. Even if the investor agrees to give you funding, they may do so under the condition that they put someone to help you manage the business or hire a consultant to work with you.
7. Too Much Fluff, Little Substance.
From the ideas in your business plan to how you deal with them, avoid the tendency to impress investors with extravagance, pomp and pageantry. When making projections, avoid putting unnecessary expenses like buying a private plane for your service, purchasing advertising space in the Super Bowl, and other dot-com excesses. Or you may be tempted to wine and dine them in the fanciest restaurants in your area, or lavish them with gifts and favors so they will open their wallets to you.
In doing so, you may give them the wrong impression that too much is being spent on cosmetics and not enough on substance. And if you can afford to give them luxury, why do you need their money in the first place?
8. Poor Communication Skills.
You must be able to clearly and concisely present your ideas to the investor. Your business plan must be well written with the ideas succinctly expounded. If faced with the investors, you must be able to answer their questions about the proposal in a clear and logical fashion. You do not want to give the investors any reason to doubt your capabilities. In some cases, you may only have two minutes, often called “elevator spiel,” to attract an investor’s interest.
Your ability to respond well to their comments and questions indicate to them that you are well-versed and knowledgeable about the business, and that you have the confidence to lead a business.
9. Inability to Take Criticism.
You come to the potential investors with the idea for your business fully formed. You’ve thought long and hard about your business. Your business plan reflects your vision and your strategies to make the business work.
However, the investor may not see the business in the same light as you do. In fact, what may be the best approach for you in how to market or distribute your product or service may be the opposite in the investor’s mind. Or the investor may see some business concerns that you haven’t thought of before, but could adversely affect your business.
You should always expect questions, comments and criticisms from investors. If you bristle at their criticism, they may see that as immaturity on your part. Worse, your unwillingness to listen only proves to them that you may not have the openness and flexibility needed to steer a business through a changing business landscape.
Investors, who may not know you personally, will seek guarantees about your creditworthiness and personal character. You should expect them to gather information about your business and personal background.
They simply want assurances that their money is going to be treated with a lot of consideration and prudence. After all, it is their money. If you present yourself to them as someone who may spend their money recklessly and indiscriminately, expect the deal to be cut off.
You must therefore assure the investors exactly how you would use their funds for the business. You must convince them that you are a person they can trust, and that you are aware of your responsibility to them as your investors.
Recommended Books on Why Investors Say “No” and Reject Requests for Funding:
- Get Your Business Funded: Creative Methods for Getting the Money You Need
- What Every Angel Investor Wants You to Know: An Insider Reveals How to Get Smart Funding for Your Billion Dollar Idea
- Angel Financing for Entrepreneurs: Early-Stage Funding for Long-Term Success
- Angel Investing: Matching Startup Funds with Startup Companies–The Guide for Entrepreneurs and Individual Investors
- Attracting Investors: A Marketing Approach to Finding Funds for Your Business
- CrowdFund Your StartUp!: Raising Venture Capital using New CrowdFunding Techniques
- Pros and Cons of Financing a Business
- What Investors Want Before Funding a Business
- How to Raise Money to Finance a Franchise
- How Angel Investors Can Benefit a Small Business
- Book: The Last Chance Millionaire