Less than 1% of startups get funding at the seed or startup phase. Of those that get seed funding, less than 1% get future rounds of funding. In America, the Small Business Administration estimates that “only 0.1 percent to 0.2 percent of funding requests made to VC firms result in an investment”. In other words, companies that raise multiple rounds of funding are literally less than one in a million.
Of course there are exceptions – if you are Elon Musk, you can raise funding with just an idea. But investors, unless they’ve lost their marbles do not invest in “ideas”. They invest in businesses that will turn a profit which they can leverage (typically) into a sale. Naïve entrepreneurs (and I meet many) often confuse investors with donors. They feel that investors should love their bright idea.
Therefore, startups should focus on revenue instead of funding. Paradoxically, companies who generate revenue are the ones that often get funded. But given the above information that investors are looking for companies that generate revenue and that either do or will eventually generate profits, maybe that isn’t so paradoxical after all.
The thumb rule is that startups need to expect to generate at least $10 million in sales within six years of starting for most external investors to consider investing. Most startups will never reach those kinds of numbers, yet they think they will and try to convince investors (who know better) otherwise. Scott Shane (http://www.bloomberg.com/bw/authors/2250-scott-shane), author of Fool’s Gold: The Truth Behind Angel Investing in America estimates that 0.4% of startups achieve $100 million in sales in six years yet thousands of business plans show projected revenue of that order in their business plans.
The favorite company for investors is one which generates revenue AND when funded by them will generate profits. Thus, they are needed i.e. the entrepreneur cannot succeed without the investment, and their investment will generate returns (from the profits or from a sale). How much should that return be? That’s another blog’s worth. Coming soon….
Great article.
Additionally, I have seen that the idea is usually not strong enough to stand on its own to generate revenue, and the founders somehow are not willing to accept that (it is difficult!).
In case the idea, product/service and execution ARE good, I believe that the “wait” for revenue goes a long way in “building the character” of the entrepreneur (inspired by Bill Watterson – Calvin and Hobbes :)).