It is true that investor rejection is painful for startups. Often the reason is deeper and beyond what is openly communicated. Tom Blomfield, a partner at Y Combinator and founder of Monzo Bank, lately stated that investors may pass on startups due to perceived shortcomings in the qualities of the founders. He defined it like a founder is not appearing impressive or is not smart enough. These are usually unspoken assessment and are deep rooted in the uncertainty in early-stage investments as the future outcomes are highly unpredictable.
The law of returns dictates in the venture capital landscape that a small number of highly successful investments will generate the majority of a VC firm’s returns. This highlights that the founders should convey a compelling vision and demonstrates the potential for significant growth as well as returns. VCs are basically focused on identifying startups with the potential to achieve 100x to 1,000x returns. Hence, the founders are required to exhibit deep market understanding as well as a clear path to rapid expansion.
Success in fundraising highly depends on the presentation of a future where the startup captures a substantial share of a growing market. Moreover, founders should leverage the market metrics as well as data to substantiate their claims. Hence, a thorough understanding of key metrics is required. They should understand customer acquisition costs, lifetime value and growth rates. VCs use these metrics to evaluate the potential of startups.
Take a note here that the addressable market size is also an important metric. It represents the theoretical revenue opportunity available to the startup if 100% of the target market is captured. However, it is important for founders to present realistic market estimates and it should be backed by solid research and data. Founders should avoid exaggerations as these may undermine credibility with investors.
