♞ Common Reasons That VCs Pass

What are some of the most common reasons VCs choose not to invest in a company?

I firmly believe that a significant portion of founders make fundraising more complicated than it needs to be by falling into traps that should be easy to avoid. To help you avoid this, I have spoken to 25+ investors in the last week and asked them all what the top 3 reasons are that they don’t invest in startups. Based on this data, I have compiled a list of what I believe are the top 3 reasons that VCs pass. All of these are things that you can solve for before you ever step into a VC meeting. This tells me that the majority of rejections are for predictable reasons, which aligns with my own experience. If you avoid these three reasons then you significantly improve your chances of fundraising.

1. Startup/Investor Fit - The #1 reason that VCs pass is that there is no fit between them and the startup. This breaks down primarily into two categories: (i) industry, (ii) stage. Many investors are only interested in specific industries or are targeting new markets when investing. Currently, for example, many VCs are passing on non-AI opportunities because they don’t want to allocate funds outside of that industry. Before you meet with a VC, you should know what industries they invest in (look at their past investment history) and ask them what industries they are looking at right now; if there is not a fit, then you are likely wasting time. When it comes to stage, most investors have a check size that they are comfortable with. The stage at which they invest represents the stage at which that check size provides the most value to them. If you are putting in small checks late in the game, then you won’t get any significant influence or holding, so you need to put in money earlier. You should be aware of the stage at which investors invest, as they rarely step outside that comfort zone.

2. Revenue - Most investors won’t back companies that have no revenue or where revenue growth is too slow. Especially in the age of AI where companies are getting up and running very quickly with accelerated growth, investors often want to see you promptly accelerate to $10-12M ARR within a year of founding. It sounds crazy, but that is the current market expectation. If you don’t seem like you are headed towards that type of growth, then it is unlikely that you’ll see much success.

3. Incorporation - Especially among US investors, there is a strong preference for Delaware C Corps. If you have another type of incorporation, then most investors will pass; it simply isn’t worth the risk to them. This can be easily overcome with a bit of planning. It’s a stupid mistake to make.

Are you looking to grow your business? Here is how I can help:

📱 Book a Strategy Call to get 1:1 feedback on your pitch, pitch deck and/or fundraising strategy. (If you need general startup advice, then reply to this email, and I’ll let you know if/how I can help.)

Onwards and Upwards,

Liam Gill