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Sunday, January 4, 2015

Top 10 Reasons Why Investors Reject Financing New Businesses

Ever wonder how start-ups find capital to fund their businesses?

A study was conducted by an American research firm to analyze a 10 year historical performance of new businesses opening and businesses closing down. The study reported  that an average of 46.4% of new businesses fails within the 2 to 5 years of operations. From an industry perspective, real estate being the lowest at 30% and technology having the highest at 55%. Some takes a bit longer but eventually closes down.

Also, start-up funding is not as easy at is seems. Based on the same study, roughly 98% of new businesses from young companies are rejected for venture financing. What I learnt is that the reason for such high rejection rate is not satisfying certain criteria.

So if you are in the lookout for investors to finance your up and coming businesses, let me share my top 10 reasons that you should avoid to ensure high probability of getting an investor - or at least spike their interest based on what I learnt from by studying and working in several start-up environment.

Top 10 Rejection Reasons for Financing New Ventures

1. Opportunities that are non-market centric tends to be unattractive opportunities. These are opportunities that are unfocused regarding customer needs. Some of the indicators are companies who have low customer loyalty, a payback to the user of more than 3 years and unable to expand beyond a one-product company.

2. Opportunities that competes in industries that are highly concentrated, perfectly competitive, or that are mature or declining are typically unattractive. Capital requirements and costs to achieve distribution and marketing presences can be prohibitive and price-cutting.

3. Opportunities that have unknown market size with growth rate of less than 10%.

4. Opportunities that forecasts less than 5% market share within 5 years as well as competing in markets with low demand yet high supply.

5. The time to breakeven or positive cash flow is more than 4 years and the ROI is less than 15% - 20%. 

6. There is low value-add strategic importance such as distribution, customer based, geographic coverage, proprietary technology, contractual rights, and the like. 

7. There is no exit mechanism and strategy. Giving some serious thoughts to the options and likelihood that the company can eventually be harvested is an important initial and ongoing aspect of the entrepreneurial process. 

8. Non-attractive opportunities don’t have existing teams that are strong and contain industry rock stars. A team with no proven profit and loss experience in the same technology, market, and service area would most likely result to a poor-performing business. 

9. Founders that are misaligned to the requirements of the business is a sign of poor fit which results to rejection. 

10. The core technology that runs the business has many substitutes or direct competitors.