Has your startup failed before? I don’t mean the exact company that you just founded, but the business idea that you are attacking. It’s not necessarily a bad thing to try to take on a problem that has already gotten the best of other entrepreneurs. Difficult problems can be the most rewarding and can offer great opportunities. But when I was a venture capitalist hearing one of these pitches, it was very frustrating when the founders didn’t realize that there have been other, failed companies in the same space.
If you are pitching something to VCs that has failed before, you need to be able to talk intelligently about what caused the previous failures and how your startup is different. Venture capitalists will want to know that you are aware of the risks in your space and that you are taking intelligent steps to overcome them. Not knowing about other startups that have failed is fine if you are starting a company on your own (I guess), but if you are approaching funding sources you better know if there have been big-time venture funded failures with a business plan similar to yours.
I was always a bit surprised when I knew more about companies that had failed in a space than an entrepreneur trying to pitch me. That really shouldn’t happen. You’d be surprised at how many entrepreneurs present business plans to venture capitalists that have flamed out spectacularly and don’t know it. A little internet research can go a long way, as can some networking in a space before putting together a business plan and starting the fund raising process.
A venture capitalist’s natural response, when hearing about a startup in a space where a number of other venture backed businesses have met an early demise, is to assume that there is something wrong with the particular industry. “It must be a bad market,” goes the typical thinking. Is it a bad market? Just because a problem is interesting, or just because a startup has a technology that could potentially be applied to a particular space doesn’t mean a new company can be built. Maybe customers don’t have a high enough willingness to pay. Maybe switching costs are too high. Perhaps the existing distribution system is not open to new solutions.
When pitching VCs you need to be able to address these “bad market” fears. Inexperienced entrepreneurs tend to respond to the idea of repeated failure in their market with the response, “but our product has this particular feature.” I don’t believe that most VCs will buy that argument. Was the absence of a specific feature really what caused the failure of all those other venture backed companies?
A better response would be, “I’ve spoken with the founders of failed company X and Y, and they explained their companies’ failures as Z. My startup is taking the following steps to not fall into that same trap.” VCs will call the founders/funders of those failed companies; why don’t you? People who founded and failed, in my experience, are very open to speaking about their experiences. After all, they had the passion to attack a problem - they still probably have the passion to talk on the phone with someone else about it.
Knowing the previous players in your space will not only help you navigate through the industry, but will also impress the venture capitalists you are meeting with during your fund raising process. Don’t unknowingly pitch failure!
