Raising funds for a tech startup takes a lot of work. As a founder, it may be tougher than running your business. Depending on where you are, you will face many challenges, despite the uptick in interest from VCs and Angel Investors globally. The harsh reality is that only a few startups will actually raise, and not all startups that have raised before will continue to be successful at it later down the road. Today we will peak into the challenges around fundraising and what Founders can do should they fail to raise.
Reasons why startups fail to raise
Failory published a list of startups that saw their journey end because they failed to raise the funding they needed. Here are just some reasons they failed to raise funding:
Poor financial planning: Not getting finances in order, and more importantly, not understanding their numbers. Even if you hated math and accounting in school, as the Founder/CEO/COO of the company, you need to suck it and learn how to interpret it.
Lack of investor interest: not building genuine interest in the startup by the right VCs can leave you out in the cold.
High burn rate: you’re spending more than you’re making. This is unsustainable and investors will not continue funding. At some point, they will just cut their losses and move on.
Failure to hit milestones: a red flag relating to several aspects in your business.
Bad timing: being too early or too late will result in failure to capture market share.
Lack of traction: investors have many startups to choose from. Without a proven track record of success, such as a large customer base, revenue growth, or high user engagement, it will be challenging to convince investors that your startup is investable.
Unreasonable valuation expectations: overvaluing your company and not being open to reasonable negotiation can and most likely result in lost investment opportunities.
Fundraising fatigue: yes this is a thing. Fundraising is hard, time-consuming, and highly involved process with serious implications. It requires time, focus, persistence, and resources. The Founder will, without a shadow of a doubt be torn between running the business and raising funding. Fatigue and disappointment can set in, resulting in a loss of momentum and drive or eagerness to raise over time.
The Challenges Around Fundraising
Limited availability of funds - Every investor gets hundreds or thousands of requests a year for investment. Not all fit their mandate, while others are just not investable. Even the most promising ones come with no guarantee of success. It takes more than a great team and a unique selling proposition to be successful. At the early stage, this is all a gamble based on estimates, research, and a bit of gut feel.
It's a tough market - if there are low barriers to entry, competition is going to be stiff. Ideas are rarely unique, so it comes down to execution and the ability to get the lion's share of the market. With the number of startups launching on the rise, investors have choices. Even with a solid track record, startups need to stand out of the crowd and this is difficult in a crowded market.
Market fluctuations keep investors and founders on their toes. We see this with investment drying up in the west. Africa is on the rise, but the numbers look great because we are growing off a low base. I expect these to slow down in the coming year as we see investors throw less caution to the wind and tighten up due diligence. Macroeconomic and political factors should not be ignored, irrespective of sector/industry/country. What was attractive yesterday, may not be the desired flavor tomorrow.
Inaccessible funding sources - as a startup, you may not qualify for some funding. This could be because of the racial makeup of Founders of the company, a limited entrepreneurial ecosystem, an investment culture not conducive to high-risk investments, a lack of investors present in your specific sector - the list goes on.
What Founders Can Do to Save Their Company
Re-evaluate their business model - is your model sustainable, scalable, and profitable? Is your burn rate justifiable or can you identify areas where you can bring down your spend? Can you improve internal processes to streamline operations and cut costs, while still growing your customer base and revenue lines?
Improve revenue generation - Revenue is investment from your customers. It should be the first source of investment should you focus on. Can you introduce other sources of revenue? Can you grow revenue to cover all your costs? How can you increase revenues to, at the very least, break even? Improved revenue generation can reduce the need for external funding.
Look for alternative sources of funding - you are not limited to VCs and Angel Investors. The alternatives are grants, crowdfunding, and loans. This may be sufficient to get you through and build capacity in other aspects of your business to get off the ground and grow.
Build your personal and professional networks and connections should not be underestimated. Build relationships with possible investors, mentors, and advisors, with intention. Don’t be that annoying transactional founders who just leach off others, by looking for free mentorship/advice and expect handouts.
Cut costs and optimize spending - frugal is the word you’re looking for. Optimize your costs, and reduce your spending while increasing your revenues. This goes back to understanding your financial makeup and knowing how to interpret it so you can implement effective financial optimization strategies without risking the quality of products and services offered. Consider outsourcing non-core functions, negotiating better deals with suppliers, and strategic partnerships to enhance service delivery, just to name a few. Ultimately, you want to bring your burn rate down to a palatable level.
Focus on bootstrapping - reassess your growth plans based on the resources and money at your disposal. It’s not a train smash to grow organically. Organic growth can be slower than a VC-backed startup, but this is not always the case. Consider the upside in terms of retaining control and avoiding unnecessary equity dilution as a result of external funding.
Pivot or diversify - be deliberate about how this will be done and why. Pivoting involves a change to your business model, the product or service, and/or your target market. You may need to pivot to ensure longevity, making you more attractive to investors later down the line. Diversification on the other hand, involves reducing the dependency on current revenue sources, by introducing new product lines, or services, and/or entering new markets.
Fundraising is hard. Very hard. You should never jump into it unprepared and uneducated. It’s also not the only path to success. If you find yourself unable to raise, there are several factors to reconsider, viz. Your business and revenue models, your target market, your market offering, and your cost structures, to name a few. You can consider alternate sources of funding by leveraging your networks and connections. You can pivot or diversify to survive, and bootstrapping is always an option. Be resilient and adaptable as you can overcome these challenges and achieve success.