Investors (VC / PE, corporates) are continuously scanning the market to find the right fit targets to either acquire or invest in.
Here are the top three reasons I’ve seen why an investor might decide NOT to invest in an early-stage company target.
And conversely, if you’re a company looking for capital or to be sold, some considerations to keep in mind:
1) Inability to understand quickly what the target’s competitive differentiation is
Even within one sector, there are dozens of targets (sometimes hundreds) that check the box of size, geography, and keywords.
And 99% of them look very similar on paper.
A target’s inability to explain why their product or service is differentiated from others in the marketplace is the #1 reason why they are passed over by investors.
Even within hot sectors, an investor is always looking for a company with the secret sauce.
Lesson for early-stage companies: Make it easy for potential investors. Sharpen and communicate your company’s distinct value proposition across your website, your case studies, and your product pages. Avoid buzzwords.
2) Challenging to have a data-driven conversation with the target
Once the target and investor are under NDA, most investors want to quickly get their hands on easy-to-digest materials.
That means, at the very least, an investor-ready presentation with reasonable financial projections, management team bios, customer pipeline information, competitive positioning, and product/service description.
But too often, companies are ill-prepared with the information or only have some marketing materials ready. That means likely being taken off the investor’s list for a while, or even forever.
Lesson for early-stage companies: Even if you don’t currently need capital or aren’t looking to sell right away, be ready enough with the basics to have a conversation if these options are on your 2-3 year horizon. If approached, you can sharpen your pencils.
3) Target does not having a realistic go-to-market strategy or is unable to explain how it will acquire and keep customers
Too often, the company is only focused on building the product, adding new features, and trying to create intellectual property – all necessary but not sufficient to generate traction in the marketplace.
From an investors’ perspective, an above-average product with sales and a healthy pipeline nearly always trumps a superior engineered product with no pipeline.
Lesson for early-stage companies: Build your bridge as you walk on it. Focus on early customer wins and use cases even with a minimum viable product.
The fastest way to convince an investor is not with a product demo but with logos and a pipeline.