Top 7 Reasons For Startup Funding Fail

Most funding attempts by young companies fail, no matter what type of business funding they are trying to get.

That’s true for business credit cards, trade credit, commercial bank loans with or without SBA guarantees, Kickstarter or Indiegogo crowdfunding, SBIR federal grants, and equity fundraising from angels and venture capital firms.

Why is that? Why do so many young companies seek funding only to come up short?

Here are the seven biggest reasons for startup funding failure, most of which are fixable.

  1. They don’t do their homework beforehand
  2. They don’t do the necessary work during
  3. They make rookie mistakes
  4. They’re looking in the wrong place
  5. Their business isn’t ready yet
  6. They aren’t competitive
  7. The process isn’t fair

#1 Funding Fail: Lack of Homework

Business funding is not easy. Each color of funding has its own language, its own processes, its own rules for success, its own set of players.

But impatient entrepreneurs who suddenly need cash, now, often want to skip over the preparation part of fundraising. Just get it done!

Unfortunately you will stick out like an unwelcome stranger if you don’t spend time even understanding the basics of funding.

Related: The ‘Secret’ Path to Startup Business Credit

If you’re reading this, you have the tools to start fixing the #1 funding fail with a few clicks, and an investment of your time.

#2 Funding Fail: Insufficient Effort

Most types of business funding require that you do lots of work.

  • Business loans require good financial data and often a business plan
  • Business grants require a completed grant
  • A Kickstarter crowdfunding campaign needs a video and a well thought out social media campaign, just for starters
  • Angels and VCs will expect a clear pitch deck delivered professionally, and lots of information during due diligence if you make it that far.

Related: Due Diligence Overview

The list above is really just a start.

Once again, impatient entrepreneurs who don’t put in the effort to deliver what funders expect end up failing.

#3 Funding Fail: Rookie Mistakes

Even those who think they are putting in effort to raise money for their business can stumble into errors that immediately disqualify them. These can include:

  • Putting your personal social security number on a business credit application
  • No cash flow forecast when seeking bank loans or equity fundraising
  • Grant applications that focus on the company, not the project to be funded
  • Kickstarter campaigns with too-high goals or unattractive rewards
  • “We have no competition” written in business plans for equity fundraising

For many first time entrepreneurs, the funding process is a new world. Heck, lots of other parts of starting a business are new! Mistakes happen as a result.

But if you do your homework you can at least avoid the rookies mistakes!

#4 Funding Fail: Looking for Funds In All The Wrong Places

Business funding sources are all specialists. They have built their operations around a particular model of business, and funding needs.

Related: What Type Of Business Funding? Start With ‘Why’

Here are just a few examples of funding mismatches:

  • A tech startup looking for a bank loan to fund product development
  • A services business entrepreneur looking to angels for funding of a business he wants passed on to his kids (I said no!)
  • A small business that just needs a $15,000 loan asking a megabank that loses money unless the loan is at least $500,000.
  • A successful niche business entrepreneur seeking venture capital to grow his company from $5 million to $15 million in revenue over the next seven years (too slow! too small! that’s what they were told)
  • A B2B software as a service company trying to crowdfund via Kickstarter (how do you make a sexy video for that?).

As part of your homework you need to understand why you need money, what types of funders match with your needs and your goals, and specifically which of those types of funders like to do business with companies in your geography, your stage of development, and your industry.

#5 Funding Fail: Not Ready Yet

Part of funder specialization is focus on a particular stage of company development. Impatient entrepreneurs will fail in fundraising if they approach a funder too soon – that is, before they have hit the minimum milestones those funders are looking for.

Those milestones might be:

  • Product prototype developed
  • Initial customer interest letters
  • Minimum Viable Product (MVP) released
  • A few months of end user experience
  • Some number of months of paying customers
  • At least three months of rapid growth in paying customers
  • Within 3 months of cash flow breakeven
  • Three months of positive operating cash flow
  • One year of revenue generation
  • Three years since incorporation
  • More that $100,000 Monthly Recurring Revenue (MRR)
  • At least one year audited financial statements.

Do your homework and find out funders’ minimum business milestones. And while it’s great to keep them informed of your progress on an informal basis, don’t submit a formal funding request until you have at least hit those milestones.

#6 Funding Fail: Uncompetitive

Some types of funding are as competitive as applying to a top ranked college or university. The funders have the luxury to choose from among the very best.

Overlook funding competitiveness at your own peril. Find out who succeeded, understand why, then try to be at least as good as the winners, if not better.

#7 Funding Fail: Unfairness

Even if you’ve done your homework, you’ve found potentially matching funders, you’ve achieved more than the minimum business milestones they need to see, and you think you have a competitive funding application and pitch, you may still run into a brick wall.

Ultimately funders are human. And some operate under institutional constraints (government grants, bank loans).

This can lead to arbitrary, unfair behavior in which otherwise deserving companies or projects don’t get funded because of gender, race, ethnicity, religion, age, college affiliation, socioeconomic status, or other “tribal” designation (such as Chamber of Commerce member, or “friends of friends of funders”).

The good news is that there are some niche funders who specifically want to overcome unfairness by funding the underserved.

Related: CDFI Community Development Financial Institutions

How To Increase Your Chance Of Funding

Even if the odds of success in funding are no better than the odds of success in your business, that doesn’t mean you should give up! Start with the basics:

  • Do your homework and get smarter about why you need funding, and what types of funders match with your needs
  • Do the work required to not only meet the minimum requirements for funders, but to stand out from the crowd
  • Avoid the potholes frequently hit by other entrepreneurs, and avoid the dead ends leading to inappropriate funders.

Just like with all the other parts of your business, if you don’t make the mistakes others have learned about the hard way, your chance of success increases dramatically.