How to make your company uninvestable
As a startup founder, it’s easy to view your business solely from your own perspective. Your startup idea is surely unrivalled in its brilliance, bordering on genius, beyond comparison.
However, whether you have multiple businesses under your belt or this is your first venture, when you start thinking about raising investment, it’s vital to understand investor mentality and see the bigger picture through their eyes.
The key to understanding what investors want is knowing what they don’t want. To make your business instantly uninvestable, here are five things that investors never want to see:
1) You can’t pin down why you’re different
This might seem obvious but for some startups, it isn’t an easy task. To secure investment, it’s vital to set yourself apart from your competitors otherwise investors will switch off. Can you define why you’re different and how you’re new in your market? It’s surprising how many founders can’t articulate this clearly during a pitch.
If this is you, start by asking your customers why they chose your product or service - you’ll gain invaluable insights. Investors love to see a business that embraces a customer-driven approach and understands what gives them the edge over competitors. When you speak to investors, highlight how you stand out and show them why no-one else can do what you do.
2) You don’t have signed Founder Agreements
When you start any business, sometimes things don’t work out and one or more founders might leave during its infancy. As a result, investors want to make sure that all founders have signed a Founder Agreement that includes share vesting, Intellectual Property (IP) assignment and non-disclosure provisions.
Without this agreement in place, it could get messy. For example, if one founder decides to leave, they could claim the company’s IP is theirs, and you have no written evidence to prove otherwise. Things fall apart, your company becomes univestable.
3) Your evidence is sketchy
Investors won’t take the claims in your pitch deck at face value. If you tell them that every month you have 50,000 website visitors and 5,000 app downloads, investors can verify this using services such as SimilarWeb and App Annie. Freaky spike in your data? Tell investors about the press release or promotion that caused it.
Your investors want to know they’re backing a reliable proposition with genuine potential to grow. You’ll persuade them by being honest about your current strengths and opportunities, not by fudging the figures.
4) You don’t offer investors SEIS/EIS tax relief
At SeedLegals, our research suggests that two-thirds of UK angel investors refuse to invest in startups that don’t qualify for the UK Government’s Enterprise Investment Schemes (EIS and SEIS). These schemes give investors a tax break on their invested cash and on the profits of selling their shares if they keep them for at least three years.
Qualifying for these schemes is beneficial to you as a founder too because the rules state that investors have to abide by ‘the ordinary risks of an investor’ and therefore can’t get preference shares, non-diluting shares, or a return on capital promises which could be detrimental to you down the line.
5) Your valuation is too high
Many funding round discussions fail in the early stages because the parties can’t agree on a company valuation. Investors think it’s too high, founders think it’s too low. At SeedLegals, we have a data-driven solution to that problem. Based on thousands of funding rounds, we see founders selling a median 15% equity in a funding round.
That leads to a simple formula to kick-start your negotiations: your pre-money valuation (that is, the value of your company not including the money you’re aiming to raise) is five times the amount you want to raise. We created a guide to help you value your company, and to justify that valuation to investors: SeedLegals | How to value your company
Avoid these five mistakes and you’ll be a more attractive prospect for investors. To find out how SeedLegals can help you set up Founder Agreements, speed up funding rounds, qualify for SEIS/EIS and more, visit us at Seedlegals | Start