Why Pre-Seed And Seed Investors Will Say No To Investing In You

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This is is part of my live-learning series! I will be updating this post as I continue through my journey. I apologize for any grammatical errors or incoherent thoughts. This is a practice to help me share things that are valuable without falling apart from the pressure of perfection. 

In this post, I share why pre-seed and seed investors will say no to investing in you from my experience at Speak Ai trying to raise a round.

You are too early

This can come in many forms. Most people will get this feedback in terms of revenue. However, it could also be because you don’t have a complimentary co-founder (often someone technical), you have no advisory board, your company isn’t incorporated properly, you haven’t talked to potential customers or you frankly just seem inexperienced and unprepared. 

Sometimes, you can have these pieces but your structure of the round or clarity around terms, valuation, go-to-market and use of funds is not solid.

The general feedback you will receive on revenue if you aren’t a multiple-time founder with a successful exit, someone without the luxury of well-resourced networks, or an ex-FAANG employee is that it needs to be higher. 

This can be subjective, but I’ve repeatedly heard two markers that seem to create a switch for investors: $40,000 to $50,000 MRR or $1 million ARR. It seems at this point, you have de-risked what you are doing, showed there is validation and traction of a market that is willing to pay, and you have crossed a threshold where if an investor puts more money into the company that you will be able to make that number even higher. 

There may be other questions around customer acquisition cost, net revenue retention, churn rate and average deal size, but the scrutiny on those will decrease in early rounds if you hit those milestones.

Now, I’ve seen well-connected people work hard to raise funding on a 50x revenue multiple but that’s a big valuation to grow into that puts pressure on you to perform. It may not even truly be what you want. 

The “you are too early” line is a paradox when you go to pre-seed and seed investors who are supposed to be investing early. While valuations soared not that long ago, with recent market volatility, more validation is often required. So, the best thing you can do is to put your head down, figure out how to create value and aim to hit those milestones as soon as possible.

What is interesting and somewhat hilarious is that some companies will purposely raise before generating revenue because when left up to the imagination and good storytelling, “opportunities of a lifetime” can be created. Once the revenue starts to generate it will often never be enough and an entirely new blocker can be created. 

We’ve invested in one of your competitors

This one seems fair. On multiple occasions for Speak Ai, we’ve had investors tell us they have a company in their portfolio that at least competes with us in some way and therefore they are unable to proceed.

Now, this could be completely valid or a great excuse, but either way, it is possible and depending on your sector even likely that you may hear this feedback.

Accelerators like Y Combinator, 500 Startups and Techstars don’t have these same limitations and will often invest in companies competing in the same space (although we’ve heard some critique of the “Y Combinator mafia” around their darling child Stripe). 

These accelerators will often take a considerable amount of equity from your company at an early stage. Some argue this is worth it (especially for first-time founders with little traction) while others argue it is predatory.

Your space is too competitive

I got in a little huff about this after hearing it too many times but it can be a valid reason not to invest. 

Specifically, Speak Ai is in the speech recognition and natural language processing market. Who else is in this market? Amazon, Google, Microsoft, and other big dogs. Then, there is another category of startup companies that have brand awareness and traction in the market like Otter, Rev, Deepgram and more. 

Why does this matter? Here’s an explanation from an early-stage investor:

“You want to be in a high-growth market (that normally attracts a lot of entrants) but you need to be a leader within whatever niche you’re pursuing. The lion’s share of the profits in the industry goes to the leader. Followers fight for scraps. In order to be a leader, your offering needs to highly differentiated and that’s why investors are asking you what makes you different. Highly recommend that you check out Richard Koch’s book The Star Principle, essential reading for any entrepreneur or business leader.”

If your market is perceived as highly competitive with big players that have billions of dollars in cash reserves you will undoubtedly be scrutinized. In this case, you will be told to niche down. 

This leads to:

You don’t know who your customer is

Often another valid criticism. 

Early-stage companies depending on their makeup may not have any customers. They may have a rough idea but when that is hard to articulate to investors it is a signal you don’t have clarity and don’t know enough to show how you create value for the customers you plan on marketing and selling to.

In this case, I recommend spending time building out customer profiles and not just a customer, your “ideal customer profile”.

If you can, use LinkedIn Sales Navigator filters to build them out with job title, industry, company size, seniority, geographic region and other important attributes. Hopefully, there are a lot of people available once you filter down completely. If not, you better have massive average deal sizes and confidence you can sell or you may need to pick another target market.

Investors are okay with companies pivoting and know that is often part of the process as you learn, but being able to clearly articulate your customer, how you create value for them, and how they pay you is a crucial step in you raising funds on your terms.

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