One of the biggest issues that entrepreneurs have is finding investors who are willing to finance their business ventures.
Below are 10 reasons why entrepreneurs do not get financing for their business from investors.
- The Business Is Not Big Enough
- No Proof of Concept
- Trust Issues With The Entrepreneur
- Not Enough Sales
- The Entrepreneurs Do Not Know Their Numbers
- The Investors Cannot Add Any Value
- The Business Model
- Too Much Time Involved
- Not Comfortable With The Business
- Did Not Ask For Enough Money
The Business Is Not Big Enough
Some investors are looking for businesses to invest in that can grow into multi-million dollar operations. If investors feel like the business is not something that can be scaled, then they will not invest in it.
No Proof of Concept
Investors like to invest in businesses who have already done the research and testing on an idea or have proved that the idea can make money. Investors do not like to invest in businesses where they are funding the research and testing on an idea to see if it will work which, in their view, is very risky.
Trust Issues With The Entrepreneur
Investors are not only investing in a business but the person behind the business. With that said if they do not feel comfortable with the person behind the business, then they are not going to put any of their money into that business.
How does an investor lose trust in an entrepreneur?
The entrepreneur does not let the investor know about important details about the business which are important for the investor to accurately evaluate the company.
The entrepreneur cannot answer important questions about the business.
The entrepreneur has made a series of bad business decisions which gives the investor reason to believe that the business owner is incompetent.
Not Enough Sales
Investors like to invest in businesses that have customer base and sales that are growing year after year. Investors view a business with growing sales as a low risk investment. In addition to that, sales show that the business is proven (proof of concept) and has a market for their product or services.
The Entrepreneurs Do Not Know Their Numbers
The worst thing that an entrepreneur can do when presenting their business to investors is to not know their numbers. Investors do not look favorably on entrepreneurs who do not know the financial information associated with their business.
Here is some of the financial information that entrepreneurs should know when presenting to investors.
Cost of sales
Cost of manufacturing (per unit)
Customer Acquisition Cost
It is also a good idea to present financial information on a per unit basis. For example instead of saying that we spend $300,000 on manufacturing you would say our manufacturing costs about $3 per unit.
The Investors Cannot Add Any Value
One of the advantages of an entrepreneur getting an investor involved in their business is expertise and connections. However, there comes a time when investors of presented with an investment opportunity outside of their expertise. In addition to that, their contacts or people within their network do not have expertise in the business. With that said, they decide to pass on the investment.
The Business Model Is Unclear
The business model is simply the way that the business makes money. If an investor does not understand how the business makes money, then they will not invest.
Too Much Time Involved
While investors do not have a problem with advising entrepreneurs and providing them with contacts, they do not want to have to work full time on a business that they invest in. Investors usually have a lot of things going on and if they feel like an investment will consume a lot of their time, then they will shy away from that investment.
Not Comfortable With The Business
Some investors recognize the huge potential of certain investment opportunites yet they decide to pass because of their personal experiences, religious beliefs, and social beliefs. In other words they are just not comfortable investing in the business.
Here are some examples of situations that may cause an investor to pass on an investment due to personal experiences, religious beliefs, and social beliefs.
Personal Experience - An investor has invested in clothing companies in the past and has lost a lot of money. As a result of the experience, he is very wary of investing in businesses involved in the clothing industry.
Religious Beliefs - An investor's religion does not believe in eating beef. As a result they will not invest in companies who are in the business of selling beef.
Social Belief - An investor feels strongly about protecting the environment. Consequently, the investor will not invest in any company that is involved in an industry that contributes to hurting the environment.
Entrepreneurs Did Not Ask For Enough Money
Investors do not look favorably on entrepreneurs who do not ask for enough money. Savvy investors can look at a company and have a general idea of the amount of cash needed to successfully grow the business. Consequently, entrepreneurs will look like they do not know their business when they do not know how much cash they need to grow their business.
Sometimes entrepreneurs make the mistake of lowering their investment request because they think that if the investment request is low then it will be easier to get financing. This strategy, for the most part, usually backfires and the entrepreneur walks away without financing.