We offer terms to 0.2% of the opportunities we see. The chances of raising VC investment are far lower than getting into that high school, top university or coveted corporate job. In fact, you have a 11.8% higher chance of getting into Harvard Business School.

While it may sound obvious, we want founders to beat those odds, but not to game them. By tracking “loss reasons”, we aim to provide insights into why we turn down opportunities and more importantly what founders can do to improve their odds of raising VC investment.

Key takeaways

  • Founders face a ‘differentiation challenge’, to set apart their company as a whole, as opposed to one or two isolated features.
  • Sizing up the addressable market determines a startup’s potential to deliver venture scale outcomes, so it’s important to do the maths.
  • Tech-push ideas are at greatest risk of not articulating a clear use case

At seed stage, the odds of a good founding team, with a fully tested product and early signs of traction would tend to be greater. At pre-seed, it’s a different ball game. For our monthly Office Hours (our main touchpoint with pre-seed founders), we receive ~150 applications per month, of which 10% get through to a 15-minute meeting and 1–2% progress. 4 out of 46 of our portfolio companies have now raised investment via Office Hours.

To help with the content we publish on The Path Forward, we track our “loss reasons” i.e. why applications don’t get through, of which the most common are outlined below:

There’s plenty of advice on The Path Forward on how to avoid these pitfalls:

Understand the “differentiation challenge”

Startups, by their very nature should offer something new and exciting. It therefore seems surprising that 32% (the highest number of opportunities) are lost because they fail to differentiate their offering versus what already exists. However, we appreciate it’s not easy to make a new product, vision or business model stand out, or indeed to build credibility in crowded markets.

Our guide to “evaluating your startup idea” provides a hands-on approach to testing whether founders have developed a differentiated product by putting it directly into the hands of customers. A particular challenge we observe from Office Hours submissions is the “feature trap”, where applicants pitch a new tool or a small tweak to existing solutions, but don’t have enough on which to build a differentiated business.

The founder’s ‘differentiation challenge’ is to set apart their company as a whole, as opposed to staking their future on one or two isolated features.

Markets that deliver “venture scale” outcomes

Many Office Hours applications pitch perfectly good businesses, which have every chance of succeeding by gaining traction in small, but limited market segments. These businesses often succeed with organic growth or raising investment from angels, whose cost of capital, (and required rate of return) is lower due to tax breaks and incentive schemes.

However, this article on the Equity Kicker explains why VCs must do the maths on the market and the potential exit outcomes when evaluating an investment. Due to VC fund economics (a subtle way of calling out the difficulty of predicting the success rate of startups), each investment we make must have the potential to return the entire fund back to our own investors (in Forward Partners’ case, that’s £60m). That means if we have a 10% stake, the exit value should be £600m or if we have a 25% stake it should be £240m.

Assuming this outcome is based on a 3–4x revenue multiple (£60-£80m revenue in the exit year), and the startup has captured 10% of a given market, the total size of the addressable market needs to be £600m+.

If founders are going after a large market (or starting with a small bridgehead before expanding into adjacent ones), it is equally important for founders to articulate the way in which their vision could deliver venture scale outcomes. This might involve setting out a clear plan on how to scale their marketing channels, or the unit economics behind achieving that kind of growth.

Fit with a VC’s investment strategy

Whether your startup is on / off strategy is a binary outcome (affecting 20% of all inbound). If a startup doesn’t fit with the fund’s focus or investment stage (9.7%), no matter how awesome it is, it’s unlikely to get a second look.

We have an article on getting to a first meeting with VCs, which explains how to target funds that are the best fit for your business. However, the best way to get a sense of a VC’s investment strategy is to look at their current portfolio or read thought pieces by their Managing Partner(s). For instance, Nic Brisbourne outlines Forward Partners’ investment strategy for Fund II here.

Similarly, it is important to pick the right VC targets. It makes no sense to send an application to a VC if you are too early (or in our case, more often too late) for their stage focus.

Articulate a crystal clear use case with proven pain points

Few applications (9.8%) are rejected on the basis of a poor use case, though this loss reason has been increasing over time. Cutting the data by “sector” or “category” suggests this correlates with our “Applied AI” investment strategy.

In areas such as artificial intelligence, there are many technologies looking for a problem to solve but it’s important to address a clear market pain point with the solution you have built. To help tech founders, we have a guide on identifying market applications for their technology, as well as more specifically for AI/machine learning startups.


About the Author

This article was written by  of the Path Forward. The Path Forward was developed by Forward Partners, a VC platform that invests in the best ideas and brilliant people. Forward Partners devised The Path Forward to help their founders validate their ideas, build a product, achieve traction, hire a team and raise follow on funding all in the space of 12 months. The Path Forward is a fantastic startup framework for you to utilise as an early stage founder or operator. The framework clearly defines startup creation as being comprised of three steps. The first step of this framework involves understanding customer’s needs.

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