The Right and wrong strategies for getting funding for your startup

Securing investment from venture capitalists significantly increases chances of entrepreneurial success, especially when it comes to scaling a business quickly and establishing credibility. But as of 2020 the probability of a new business getting VC funding was about 0.05%.

Such financing is now even harder to nail down. Global venture capital funding plunged by a massive 48% - 65% in the United States – in the first half of 2023, according to research firm Pitchbook. Equally serious, venture capital dollars declined 34% in the second quarter of this year, plummeting from $44.4 billion raised in the first quarter to $29.4 billion, global consulting firm Ernst & Young reported in July.

So before diving into the shark tank, it’s more essential than ever for aspiring entrepreneurs to follow some basic guidelines to avoid the most common pitfalls.

The Lehigh@NasdaqCenter, an exclusive education-industry partnership between Lehigh University and the Nasdaq Entrepreneurial Center in San Francisco, conducted a systematic literature review to investigate how investors reach funding decisions – and, more specifically, to identify the factors that enhance the likelihood of securing VC funding. Our research analysed 112 articles published from 1990 to 2022 in major entrepreneurship and management journals. Here’s what we found:

Tout your venture, but without hype

Research shows that ‘impression management’ – regulating information to influence how a VC perceives your venture – increases the chances of securing funding by 20%. Here is what you need to be careful of. You’re probably so excited about pitching your venture that you might be tempted to go over the top, promising more than you can deliver. Promoting your organisation excessively, for example – as in claiming you’re the best, most innovative start-up in human history – or blasting your competition will work against you, studies have found. Potential investors perceive such founders as dishonest or unduly opportunistic. Placing too much emphasis on what you’re convinced is your uniqueness signals a lack of understanding about the market, not to mention unrealistic expectations about the actual risks your venture might actually face.

The key to scoring capital for your new business in this case is to strike a balance between swagger and modesty. By all means feel free to burst with confidence touting your next-gen blockbuster. But you’ll also be smart to admit that your venture has some weaknesses (that you plan to address). This kind of disclosure is likely to convince potential investors that you’re trustworthy and deserve to be capitalised.

Know what your potential investor is passionate about

Your chances of securing funding are significantly higher if you learn how to read the room. Here’s why. Entrepreneurship literature divides passion into two categories. One is the passion about entrepreneurship itself and the whole entrepreneurial process. The other is a passion for the product created by a venture. Research shows that investors have different priorities when it comes to passion. Those with entrepreneurial experience prefer to hear you pitch how passionate you are to be a founder, and this will thereby up your odds of securing funding by 20%.  On the other hand, investors with no entrepreneurial experience will get more excited learning about how awesome your offerings are, making you 25% more likely to land funding.

Let your face do some talking

Maybe you’re so intent on appearing business-like in your presentation that you assume a deadpan demeanour, never cracking a smile. But as it turns out, expressing facial happiness is generally positive for funding. So is frequently changing the expression on your face during your pitch. The switches from one look to another serve as emotional punctuation that can improve funder attention and the perception that you’re authentic. But beware of the impulse to smile too much: the chances of getting funding are lower if happiness is expressed for more than 36% of the pitch.

It’s okay, by the way, to express some fear, as it indicates a semblance of uncertainty or even trepidation about the venture. Contrary to expectation, expressing anger can be in your favor, too, helping to communicate that the problem being addressed is formidable. But again, a word of caution is in order here. Your odds of attracting funding drop when you express anger for more than approximately 30% of the pitch and fear for more than about 52% of it.

Demonstrate your knowledge of the anticipated risks involved

Your business proposal will face a lower probability of being rejected if you show you know the kinds of risks that make investors either comfortable or uncomfortable. That’s because investors evaluate an idea based on three different kinds of risk. Market risk arises from the competitive landscape. How big is the potential market? How much demand and opportunity for growth exists? Execution risk centers on the degree of difficulty in implementing your business model. Lastly, agency risk revolves around the possibility that you as the founder will pursue your own interests over those of outside equity providers like partners and investors.

The upshot? Research shows that if you have entrepreneurial experience, investors are more likely to decline your proposition because of concerns about agency risk. On the other hand, if you have no such experience, investors are more likely to say no to you out of concerns about either market risk or execution risk. Tailor your pitch accordingly to emphasise the risks that investors might be concerned about, based on your level of experience.

Follow the classic formula for winning pitches

According to entrepreneurship researchers, a perfect pitch should incorporate certain key elements. Start with a projective story that paints a vivid picture of your expected growth and profitability. Segue into showcasing your strategic distinctiveness or competitive advantage in the market.  Highlight your tangible and intangible resources such as unique know-how and skills, to exhibit the special value you bring to the table. Throughout, you should also cite prestigious affiliations with top institutions and individuals to bolster your credibility, deliver a thorough market analysis to show you understand the lay of the land, and present a revenue model outlining your plan for generating income. End your pitch with a call to action compelling enough to convince potential investors to back your business.

Last year, more than a million new businesses were established in the United States, with some no doubt still in the throes of seeking funding support. That changes the equation for entrepreneurs. As individuals take the plunge into the marketplace at an accelerated rate, competition to secure funding across the investment landscape will only intensify. If you’re going to increase your chances of success – and bring your vision to fruition – you’ll have no choice but to up your game.