Top Reasons Angel Investors refuse to back a Start-up

Posted by Ilayda Taze on Feb 04, 2020 07:07: AM
Ilayda Taze


Ilayda Taze is the CEO of London-based TrendScout. A young entrepreneur with a financial background, Ilayda has a keen interest in rapidly changing technological landscape and its impact on the world.

We live in a technologically advanced world that has made our lives much more convenient than our parents or people before them had the opportunity to enjoy. You no longer need to step out of your house to try your favourite cuisine, or step off the curb to hail a cab. Why? For the simple reason that there is an app for that...

...running out of groceries? Place your order on Amazon...

...need to catch a flight at 3am? Call an Uber.

In the last few decades, start-ups with a modest beginning have turned into multi-billion-pound behemoths by coming out with technologically-advanced innovative products that could solve big problems with just the click of a button. These start-ups were successful in identifying the unmet needs of their target customers and in the process managed to cash in big on their highly lucrative offerings. And so did the lucky investors who took a risky bet on a fledgling company that happened to land on an idea that worked.


What is start-up investing?

Start-up investors are essentially buying a part of the company with their investment. They are putting money in the newly-formed start-ups in exchange for a portion of the company and rights to its potential future profits. If the start-up goes on to hit it big, investors can expect to make a windfall. On the flip side, they can lose all their money if the start-up fails to live up to its billings.


Why investors will not dole out the money for your start-up?

Over the course of my one-and-a-half decade-long experience in the financial industry, I have come across dozens of entrepreneurs who failed to secure the requisite funding for their ventures from seed investors. When I ask the reason for the refusal and the excuses they offer for failing to come up with the desired capital, I invariably hear excuses – almost all of them either standing on a no-legged stool or, forgive me, outright lies. In fact, it is very common to hear lame excuses like: ‘I do not understand this technology. I have no money. This is not the right time. Amid the Brexit turmoil, my wife may not approve of it and so on and so forth.’

Not getting the funds to advance your business is only a part of the problem. What’s worse is that many budding entrepreneurs believe their lies and adjust their businesses accordingly, which further diminishes their chances of securing funding from angel investors at a later date.

Budding entrepreneurs not only need funding but also good care, advice and nurturing from experienced angel investors to succeed in their endeavours. It is precisely why in the start-up world, angel investors are often compared to real angels for the simple reason that they offer all the financial as well as psychological help to start-ups, especially in the early times where help from other quarters is less forthcoming. The funding and guidance provided by angel investors often help bring several innovative ideas to life that could have died a premature death in the absence of financial assistance. Angel funding, being usually the first third-party validation of a start-up, also acts as the most pivotal factor in a start-up’s life.

Learn here:

Why angel investors refuse to fund a start-up?

The question that’s worth asking is why angel investors go as far as to resort to outright lies to avoid investing in a start-up.

The simple answer to it is that every investor wants to bet on a winning horse. After all, it is nonsensical to lose money on purpose. Investing in a start-up is fraught with risks, but angel investors show their willingness to take such risks in anticipation of outsized rewards. However, if an investor cites your company being in the early stage or pre-revenue as possible reasons for not investing, you should know that the person is making polite excuses. The investor may be passing on your deal for some other concrete reasons because all early-stage start-ups are pre-revenue as they are in the process of just finding their feet in the market.

Angel investors make bets on amazing teams, working on “billion-dollar ideas” rather than “billion-dollar solutions” that generate millions of dollars in revenue. This is for the simple reason that you are going to get very little stake in  such companies. The fact of the matter is that you are rewarded for your risks in the world of start-ups. For example, an angel investor who invested in top British unicorns like Monzo, BrewDog, Transferwise, The Hut Group, etc. would have seen their investment grow exponentially. Early investors take a huge risk and as a result, got a huge return. Those who wait until a start-up can establish itself and starts generating handsome revenue often make a fraction of the return those early investors received.

Early-stage investors invest because they believe that you have what it takes to get this start-up off the ground. With their help and their capital, you’re going to be able to turn your idea into a huge company and this investment will work hard for them as your company starts experiencing success. However, if they say they’re worried about a lack of revenue or some other issue, it simply means your ideas and company have failed to arouse their enthusiasm. The truth is that they are unsure about your idea clicking and as such they are unwilling to put their money on a limping horse.

It is either that proof of your potential success is missing and you have an inexperienced team or the members of your team do not work together. Other reasons that might put off angel investors could be lack of a business model or plan, industry knowledge, and innovation, etc. These are a few important reasons why start-ups are unable to find the much-needed angel funding. Working on these areas will significantly improve your chances of securing funding for your dream idea.


Spot the right investors

It also helps if you are able to separate the wheat from the chaff i.e. spot who is interested and who is just wasting your time. Uninterested investors will simply raise objections and excuses whereas those who are willing will ask you pertinent questions to know more about the business and evaluate the startup's scope. They see themselves more as partners than just investors and are looking to make your idea more viable and your company more successful in the market. Avoid changing your business model based on objections raised by frivolous investors. You can raise the chances of getting adequate financial assistance up by several notches by altering your pitch based on investor questions.


Topics: investment, startup, angel investors