Why Start-ups Don’t Get Funded

How can you know if your company is in the category that VCs and angels consider un-fundable? It’s hard because entrepreneurs are frequently blinded to reality by the sheer luminance of their ideas. In my experience, and from what I’ve heard from dozens of VCs, about 50% of companies seeking funding fall into this category. One way to find out if your company is in that category is to follow these posts and if you ever read one that sounds like your company, watch out. The other is to send me your business summary and I’ll get back to you, at no charge, with my opinion and the reasons. You can send them to the e-mail address on the About page.

Several years ago at the dawn of the mobile advertising age, a potential client had what seemed like a good idea. Retailers could display a specific phone number in their magazine ads, billboards, flyers, etc. A consumer who saw the ad and was interested in the product or service could dial the number from his/her cell phone and receive a text message a few minutes later. For the consumer, there were no subscriptions, no signups, and the service was free.

The company charged the retailer to register a unique phone number to the retailer that he could then use any number of ways; webpages, magazine ads, radio commercials, etc. Consumers could receive everything from current snow conditions, to updated news flashes, to sports scores, sales events and coupon codes. Remember this was before smart phones with bar code recognitions apps were available.

The fundamental problem was the start-up had to sell individual retailers on the idea. It had to go, figuratively, from door to door signing them up. The manpower required, the feet on the street, puts a limitation on how big and how fast the company can grow. And that limitation is what made the company unfundable to investors. It didn’t scale, in the parlance of investors. Investors look for companies where the revenue grows much faster than the headcount.

Today there are plenty of web-based tools that could replace the feet on the street, but such tools were non-existent, or at least scarce, in those days. Existing web-based approaches of the time were not considered by the company.

VCs need to invest in businesses that can grow big fast in order to compete with other VC firms for limited partners, the companies that invest in VCs. Another post will go into the details of VC’s business models.

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September 2014
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