Winning a business plan contest and getting funded are not exactly the same thing. Based my experience at Excel Medical Ventures, where over the course of a year I examined nearly 100 executive summaries and business plans (of which Excel funded only a couple).
Here are seven common reasons companies fail to land funding, based on my observations at Excel (of course, often the reasoning behind the decision was more subtle; if you got a “no” from Excel, don’t assume your business plan necessarily has one of the following issues).
1. A solution looking for a problem
This is a very common problem in which very smart technical people create an interesting new technology and are trolling around for a need that they might address. Often their first application is based more on technological fit rather than customer pain. You must have demonstrable need to gain traction beyond the early adopters. If you can’t give potential customers a compelling reason to change from their current solution to yours, they likely won’t.
2. The weak team
It’s an old VC saw that you’d rather invest in an “A” team with a “B” idea than a “B” team with an “A” idea, so surround yourself with the highest quality people you can find.
You can try to hide problems from your past (e.g., previous company failures, law suits, tax problems, inappropriate Facebook photos), but someone will find them all, along with how much you gave to Mitt Romney’s presidential campaign and what your finish time was in that 5K road race last Thanksgiving.
Of course not all of this information is relevant, but rather it helps us to build of a profile of you and your team. Also bad is a pattern of failure as CEO — one failure is fine, but if you have left a wake of three or four companies and the best you can show is that one is trading on the pink sheets, maybe you should consider a different line of work.
Finally, having too many employees is a problem. If you are pre-revenue, you should think carefully about having more than a few employees. Otherwise, you may never be able to overcome your high burn rate.
3. Looking for dumb money
Don’t pull out a copy of the NVCA membership list and start indiscriminately sending out your business plan to all of the firms. You should seek money from investors who can make introductions that help you sell your product (a.k.a. “smart money”). If you have a medical device, it should be obvious not to send your business plan to a VC firm that only invests in Clean Tech. Look at prospective VC’s websites and pay particular attention to their current and previous portfolio companies. If they made a lot of money on a company that was quite similar to what you are trying to do, your chances of funding have gone up.But if they’ve been burned by several investments just like yours, you may have a hard time convincing them to take another chance in this space.
4. Unrealistic financials
Every start-up management team dreams of having “hockey-stick” revenues, but projections are worthless if you can’t describe how you’ll actually get there. Sure, your company might end up having a higher growth rate than Google, but predicting that will require significant justification. VCs often expect things to take twice as long and cost twice as much as you first predict, so try to have your numbers somewhat grounded in reality.
Also bad is not scaling your costs proportionately with revenues. It seems as if some people don’t realize that having increased sales means that you will have similarly increased COGS.
5. No competitors
Many entrepreneurs think that they are so far ahead of the curve that there aren’t really any competitors. However, based on Porter’s Five Forces, I’m sure you can come up with some other product or service that is a clear substitute if not an indirect competitor. Create a matrix of the major competitors in this space and evaluate all of them on the parameters that are most important to the customers — not just the ones that make your product look the best.
6. No exit plan
Lifestyle companies are absolutely fine. Many people have them and are very satisfied with creating this sort of structure. However, they are unfundable by institutional investors. If you aren’t going to bring your start-up to an exit, then we aren’t getting our money back and our LPs will be most unhappy.
7. Inaccurate market size
As Jonathan Rosen, one of my professors at Boston University likes to say, “Don’t bother with a start-up unless your potential market size is a billion dollars or you can reach a million customers.”
To be sure, you don’t want to pick a market too small to sustain your company at a reasonable penetration, but you should go deeper to determine your addressable market within the overall market. For example, if you have a new spinal device that addresses spinal stenosis market, don’t quote your market as all spinal devices, but focus the market down to where you will actually be competing.
Bonus: Four more pitfalls to avoid
1: Poor intellectual property position
2: Unclear clinical worth
3: No killer application
4: Un-scalable technology.
And if your medical device might accidentally become a bomb, you should definitely re-think your technology, as with my all-time favorite bad idea: The room disinfecting device that could be weaponized if used incorrectly.