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Profit Dynamics Venture Capital Survey
Introduction | How Long to Close | How To Contact | With What | Valuation Factors |Probability
Competition | Define Management | Substitutes? | Find The Deals? | Decision to Invest | Why No?
Worst Business Plan Mistakes | Common Plan Mistakes | First Impressions
Why Do They Say No?The question, "What is the most common reason why you have declined to invest in a company?" brought out nearly twenty different reasons. The overwhelming reason chosen most often was lack of an experienced, complete management team. This reason was given by 40% of all those who responded. Several respondents mentioned the necessity of building a team with depth and experience before contacting the venture capitalist. The venture capital firm is willing to contribute the expertise of its partners as well as capital, but will not back companies with glaring weaknesses in management. They are looking for talented people to back, people with previous records of success.
The next most frequently mentioned reason for declining (17%) was that the company did not fit their investment criteria, the industry(ies) on which they focus or the geographic area. Many entrepreneurs contact venture capitalists without doing their homework regarding what industry they focus on, so in effect they are contacting the wrong audience. Related to this reason was another one that appeared on a number of the responses, that the company was too early stage: the entrepreneur did not know that the venture capital firm does not invest in start-ups, for example, but contacted the VC anyway.
Following this reason was that the size of the market the company was in, or the need in the market that the product serves, was too small (13%). The chance therefore of building a significant, valuable enterprise is smaller.
The venture capital firms also said they frequently decline because the company has no competitive advantage or has a non-compelling technology (13%).
Strategic weaknesses were next most important as reasons for declining. The company said what it planned to do, but not how it was going to do it. The steps to execute the business strategy were poorly thought out or incomplete--there was no clear execution strategy (10%).
Other reasons include:
• The Company is too small and will not grow large enough (10%)
• The Company is too early stage (8%)
• The industry has no barriers to entry for competitors (6%)
• The risk is too high relative to the projected return (6%)
• The Company has low margins or the industry is facing margin pressure (4%)
• The entrepreneur put too high a valuation on his company's stock (4%)
• The Company is not profitable
• The Company faces huge, entrenched competitors
• The entrepreneur was not referred to the VC firm
• The entrepreneur did a poor job presenting the company in a meeting
• The entrepreneur viewed the venture capitalists only as a source of money, not as a value added partner
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