Our reasons to decline startup investments.
As angel investors, we are constantly on the lookout for promising early-stage startups to support and nurture. However, a big part of our job is actually saying no - from more than 1000 deals opportunities since 2022, we only made 8 investments, with a take rate of less than 1%.
In this article, we delve into the factors that make us pass on a deal, ranging from general concerns to specific mismatches with our investment approach.
⚠️ Collection of Yellow Flags
When evaluating a potential investment opportunity, we consider a variety of yellow flags that indicate potential areas of concern. These flags may not be absolute deal-breakers on their own, but collectively, they can undermine our confidence in the investment. Some of the yellow flags we often encounter include:
Weak pitch deck
If a pitch deck lacks essential information or fails to capture our interest, it raises questions about the founders' focus and experience in terms of their fundraising. A well-crafted pitch deck should not only communicate a compelling story and provide comprehensive details about the product, market, and team, it should as well ideally look appealing and is easy to follow visually.
Weak outreach
Inadequate targeting and planning in the fundraising process can signify a lack of strategic thinking or insufficient preparation. A startup's outreach efforts should demonstrate a clear understanding of their investor targets, showcasing their ability to execute a well-thought-out fundraising strategy and actually search for more than just money (e.g. fitting and helpful partners). For example, a cold, unspecific outreach (for example, a German company writing an English Email to us as German investors) leaves a bad first impression on us.
Complicated product explanation
If a startup struggles to articulate the value proposition of their product or presents a convoluted narrative, it becomes challenging for us to envision its market potential and to believe that their sales process will actually be quite challenging. A clear and concise product explanation is crucial for attracting investor interest and customer adoption.
Overpromising revenue or an early exit
Startups that overstate their projected revenue or promise an unrealistically quick exit can signal unrealistic expectations or a lack of understanding of their market and customers. We prefer entrepreneurs who present grounded and achievable goals that still match the general expectations of startup fundraising. For example, if we see a promised annual recurring revenue (ARR) of €100 million in 5 years from now, we would generally doubt this substantially.
Underestimating competition
Failing to acknowledge or accurately assess the competitive landscape can indicate a lack of market awareness and overconfidence. It is essential for startups to demonstrate a deep understanding of their competitors and outline a compelling differentiation strategy. Especially, as customers will share the same perception and often only change their current solution if it is really 10x better than the current.
No traction with substantial funding
Lack of meaningful traction despite substantial funding raises concerns about a startup's ability to effectively allocate resources, execute and achieve key milestones. Demonstrating progress and traction with capital efficiency is crucial for building investor confidence.
No data availability or weak business case calculation
Startups that are unable to provide relevant data (e.g. for their sales process, customer data, etc.) and/or fail to demonstrate a robust business case calculation raise doubts about their understanding of their market, customers, and financial viability. Thorough data analysis and a solid business case are vital for informed decision-making. With regard to a business case, we think it’s important to look at the underlying assumptions and mechanics, instead of the absolute numbers, which is why we normally see a “hard-coded business case” as a yellow flag.
Buzzword Bingo or other forms of “bullshitting”
The excessive use of buzzwords without substantive content or a clear understanding of their implications normally indicates a lack of depth or substance in a startup's business model or strategy for us.
🚩 Existing Red Flags
In addition to yellow flags, we also carefully assess the presence of existing red flags that normally mean an instant pass for us. These red flags are often more critical in nature and may include:
Big dilution early on
Excessive dilution in the early stages (e.g. above 30%) of a startup's funding journey decrease the attractiveness for later-stage VCs that normally demand a certain percentage being still held by the founders. This normally shows that founders started in a bad setup or have been tricked, leaving them less incentivized later on in their fundraising journey.
Founder disharmony
Disharmony among the founding team happens more often than it seems, and of course, it’s difficult to reveal this in the investment process. However, we try to watch out for early signs of miscommunication, misalignment and generally bad chemistry. If a founder team is not able to communicate and solve their personal problems, this can be one of the main show-stoppers later in their journey.
Weak (or no) unit economics
This does not only apply to startups with their first traction but also to their general planning and understanding of contribution margin mechanics. Generally, we try to challenge founders and see if they understand their underlying business model deep enough to be confident about their unit economics.
Previous investors not participating
If previous investors choose not to participate in subsequent funding rounds, it may indicate a lack of confidence in the startup's progress or divergence in their investment thesis. The absence of continued support from previous investors raises cautionary flags. Of course, this does not mean that all investors need to participate, but generally, we would expect some of them to continue their support.
Mismatch on Our Strategy
At JVH Ventures, we have an investment strategy that guides our decision-making process. When a startup does not align with our strategy, it becomes a reason for us to pass on a deal. Here are some common areas where we might encounter a mismatch:
No Actual Investment Case
While some entrepreneurial opportunities may be exciting, they may not be attractive for venture capital (VC) or angel investments. This could be due to factors such as limited scalability, absence of market tailwinds, or a lack of founders' experience with fundraising. In such cases, the opportunity may not present a viable investment case that meets our objectives, as we want to see strong fundraising capabilities, for example.
Limited Exit Multiples
The potential for a significant return on investment is a key consideration for us to match our portfolio logic. Depending on the entry valuation of a startup and other key factors like the market size it operates in, we evaluate whether the potential return multiples align with our portfolio strategy. If the exit multiple is limited, it may not be financially feasible for us to invest.
Read more here: https://www.jvh-ventures.com/blogentries/why-3x-is-not-enough-return
Road to Nowhere
A startup's fundraising roadmap plays a crucial role in our decision-making process. If a startup's planned fundraising rounds and targets do not align with general VC expectations, it raises concerns about their planning and revenue effectiveness. For example, raising €1.5 million to reach €500,000 in annual recurring revenue (ARR) in the software space may indicate unrealistic expectations or a lack of understanding of the fundraising dynamics. In such cases, we look for startups that have a more realistic and achievable roadmap.
Markets We Don't Understand Well Enough: As angel investors, we prefer to invest in industries and markets where we have a strong understanding and expertise. Even though we are generally very open to learn about new fields, there might be industries that are just too far away from us, to feel comfortable investing.
General know how allows us to provide valuable guidance and support to the startups we invest in. If a startup operates in a market that is far outside our domain of knowledge, it becomes challenging for us to assess the potential risks and opportunities accurately. In such cases, we may pass on the deal to focus on sectors where we can provide the most value.
Industries We Don’t Support (and founders personality mismatch)
In addition, there are multiple industries that we don’t support such as weapons, climate damaging business, social disturbance, etc. Naturally, we stay out of this and give it a pass. Also, if we feel that founders don’t fit to our core values or might be just general as******, we will not go with it just because of the money.
Conclusion
By considering these factors and evaluating the alignment of a startup with our investment strategy, we aim to make informed investment decisions that maximize the chances of success for both the startup and our portfolio. While passing on a deal can be a difficult decision, we believe it is essential to maintain a disciplined approach that ensures the best possible outcomes for all parties involved.
Are you a founder and currently raising?
Hit us up, we are happy to connect: www.jvh-ventures.com/pitch