Five Reasons You Can't Get Funding For Your Start-up

Last Updated Apr 27, 2010 11:48 AM EDT

You have a fantastic idea but for some reason, you can't get funding for it. There are lots of reasons why this could be, and what makes one investor walk away could be the same thing that gets another on board.

Private investor Paul Atherton has been investing in start-ups, mainly in the technology sector, for about a decade and after all that time, he's learned to spot the signs that show him a fledgling business will probably fail, even though it has a solid offering at its core.

Many of these signs are around the management, not the product or service. Atherton has a particular approach to funding, because he's learned the hard way how easy it is to not make any money on what initially sounded like an exciting business prospect.
Other investors may look for other signs, depending on the risks they're prepared to take, but at the end of the day, none of them will fund a business they think has a serious glitch.

Here's some warning signs Atherton looks out for:

  1. You think you can do it all: Often, entrepreneurs come from a larger organisation -- an academic institution, or a large, established business. They are specialists in a particular job -- sales, marketing, research and development -- but not necessarily as adept at the other roles the business requires. Business owners may kick against investors insisting on extra managerial appointments that they think they can handle themselves.
  2. Your market is too small: Every start up needs a strong management team to make it. This is a large overhead and luring talented recruits may mean providing incentives like a share option. For this reason, investors may be chary about buying in, if they think the market potential is too small for them to make a lucrative exit. According to Atherton, many investors won't be interested unless the overall potential is $100m or more.
  3. You can't/won't scale: Not every business owner feels comfortable in a high-growth company. For some, escaping the big company culture is the main reason they struck out on their own. Some businesses just don't have a large growth potential, because their size is a significant part of their offering. But backers want their investments to grow in value as quickly as possible and may shy away from slow growth built in.
  4. You're too far down the journey: According to Atherton, it's easy for established businesses to have made mistakes -- on partnerships or licensing deals for instance -- that are too difficult for an investor to sort out. Many prefer to get involved when the business is being formed, before any irrevocable mistakes have been made.
  5. Your business is your baby: For many business owners, the company they have built up is part of their lives. They are attached to their businesses emotionally and probably unwilling to sell up any time soon. Investors want their money back eventually -- usually sooner rather than later -- so they'll walk away from business owners they think will find it hard to let go when the time comes to sell the company.
(Pic: Comic Character Creations cc2.0)