Why do so many startups fail to raise funding?

Business Planning is the key failure here, I have been involved in a number of start ups from very high profile billion dollar organisations to small low cost models with a limited reach.

I can say it honestly amazes me that so many businesses get funding, rather than how few do.

The vast majority of business plans I have seen are poorly worded, ill thought out and over optimistic. I watch people seeking venture capital based on the "miracle model" (where everything conforms to a better than standard implementation perfectly and the market is to enthusiastically embrace the product/service without hesitation) and wonder why it is so many people can't outline a realistic financial projection with worst-worst case scenarios fully demonstrated.

This then needs marrying to a good strategic plan for implementation and a vision of what the end result will be, in a realistic and straightforward manner.

On the bright side, I have just recieved funding for a start up this week and am optimistic for achieving a similar result for another enterprise in the next couple of weeks, the devil has been in the details, but it has been worth it.

They often fail to raise funding because there is no perceived need for what they have to offer.

Pedigree.

The last 3 business plans I have reviewed include:

1. An ex-Lucent exec looking for funding to buy and operate a used car dealership on a highly desirable piece of real estate in NH.
2. A golf pro who wants to build the "facebook" of the golf community
3. The past owner of a roofing company who believes he has developed a wind technology that can take homes and businesses off the grid

You see my point...

Entrepreneurs need to understand that in today's marketplace, they must first prove their business idea (show real revenue and market traction) before asking anyone for a dime of funding.

There is no money for ideas anymore. (Unless you have the pedigree/track record for having turned ideas into millions for past investors).

Joe...

Many business owners try to find funding for a business that is either not off the ground and running with a track record, or that is based on hopes and ideas of which they don't have solid experience in putting together.

There are many business's that have started from their own sweat and have gone on to greatness by demonstrating their value, their expertise, and that they have a real and growing market available for their business growth.

It is rare that people aren't looking to invest in this type of company, where opportunity is available. But many startup don't have any of these basics, only founders that wish to have their idea funded, without putting in the basics first.

Demonstrate your passion for your business
Demonstrate your energy committment to your business
Demonstrate your own investment of money to the business
Demonstrate your happy customers
Demonstrate your growing market

You will find investors - if you still need them.

The lack of perceived need I mentioned might be better stated as "lack of customers," which is generally interpreted as evidence of (current) lack of need.

In my CFO consulting practice in Silicon Valley, I frequently meet entrepreneurs that are seeking investment capital from either Angel or Venture sources. Many of these firms will raise bits of money from friends and family or an interested Angel investor but may never raise the funds they need to get their company off the ground. Despite the benefits of what some folks describe as "bootstrapping", this only works for a small number of firms for which development costs are minimal. Longer cycle products such as a semiconductor or new medicine or medical device are not going to be bootstrpped companies and must raise funds to accomplish anything significant.

From my experience, I think that the reason most firms do not raise funding is that they are unable convey their vision to the investor. If an investor truly believes that a company is in a great market and has the right product strategy for that market, as well as the team to pull it off, then they quickly jump on board. But it is very hard to get an investor to this level of enthusiasm. The reasons are many,but include poor presentation materials, poor ideas in general, poor presentation skills or unskilled team of managers (or no managers at all). I have seen companies with no product get funding in bad markets so it is not crutial that the product be done or revenue be in the bank. But it is critical that investor buy into the story and not want to lose the investment opportunity to anther investment firm.

Obtaining investment is also a game of numbers. The more investors a person sees, the greater the chance one of them will buy into the idea. The repeated presentations also give management the time to continually refine the message until it starts to resonate with investors. Changing the presentation to meet objections and increase the vision component will improve chances that the firm will succeed.

Late last year, a client company raised over $6 million without a completed product or revenue. I believe that persistance and continual refinement of the message were crutial to the VC investment.