3 Reasons Why Your Startup Won’t Get VC Funding
3 Reasons Why Your Startup Won’t Get VC Funding
I’m always surprised by the number of entrepreneurs who immediately bring up VC funding to me when we’re talking about how to fund their business.
Only 0.05 % of startups are funded by VC funding and yet, this is the #1 funding route I get consistently asked about.
The most common funding route for startups is actually loans and credit (represent 57% of startup funding), but I can count on one hand the number of times I’ve been asked about loans throughout my career.
Maybe it’s the popularity of this funding route amongst large tech startups that has brought VC funding to the mainstream, or the large investment amounts of VC funds that make this route appealing.
Here’s the big bummer about VC funding though — very few startups are even eligible for this type of funding regardless of the business idea or how much dough they’re raking in (if you’re curious what funding route is right for your startup, take my quiz to find out).
I can tell within 3 minutes of speaking to a startup whether they’re eligible for VC funding.
VCs have hyper-specific reasons why they invest that applies to very few businesses.
Here are the 3 basic and quick ways you can tell if your startup won’t receive a VC’s attention —
You Don’t Have A SaaS or Tech Product
When you have a SaaS or tech product like Stripe, Robinhood, or Slack you are able to onboard millions of users after the development of just one product — your platform.
Unlike physical goods, you don’t have to pay for multiple copies of your product in order to make money. Instead, you just have to make that one platform one time and maintain it and upgrade it.
This results with your COGs (cost of goods sold) number going way down per customer, which leaves you with a ton of profit.
All that leftover profit is what’s essential to grab the attention of VCs.
You mostly see SaaS and tech products being backed by VCs because these models are designed to be profit-making machines.
You Don’t Have A Subscription Model & You Don’t Have First-To-Scale Advantage
Other than SaaS and tech-focused products, you’ll see companies like WeWork and Peloton that are VC backed but still require a substantial amount of product costs per user.
The reason why these companies are attractive to VCs is that beyond the initial product costs, the business is able to capitalize off of continuous revenue from user subscriptions.
In addition to this, these businesses may also have a first-to-scale advantage (whether within a lucrative target market or the industry at large) enabling them to hit rapid scale and acquire dominant market share.
When your business is built for subscription revenue while also acquiring dominant market share, you have a recipe for major financial success that VCs can’t deny.
You Can’t 10–30x Investors’ Returns
Related to all of this is the core, fundamental need for VCs to see 10–30x returns for their investments.
VCs are funded by LPs (limited partners) who are extremely wealthy individuals, families, universities, and employers. LPs give their money to VCs with the task of providing insane returns for their investments.
Going back to the points raised from the previous sections, this is why VCs’ core criteria for their startups all relate to high profitability potential.
When you have extremely powerful individuals and institutions breathing down your neck for huge returns, your priorities revolve around profitability above everything else.
Although only a small number of startups are eligible for VC funding, there are thankfully a lot of other ways to receive startup funding for your business.
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