Why Investors Say No To Your Startup

Why Investors Say No To Your Startup?



Don’t Listen To Me, But Please, Hear Me Out: # 26

Shaheeda Abdul Kader, Dec 2 2020. Updated Jan 18 2022

“Liquidity is like finding a cab when it’s raining in NYC. You can never find one when you most need it.” 


As long as there are entrepreneurs, there will be a shortage of funding. I have been investing on behalf of my family for 8 years now. Here are some reasons why investors say no to your startup and how you can better prepare.

First and foremost

KYC – Know Your Check Writer


Every investor thinks about EXIT whenever they see an opportunity. “Can I easily exit, and will I make money and how soon can I exit?” 

No matter what type of investment an investor is looking at, she’s always thinking about exit. Whether it is a stock market investment, investments in the bond market or a private business or even a start up like yours, she’s always thinking, “Is my money safe? Will my money multiply? Will somebody else buy? How long will it take before some else is ready to buy?” 

Some Venture Capitalists (VC’s) may smirk and tell you that the difference between a VC and PE (Private Equity) investor is that PE’s think how much they could lose, and VC’s think of how much can they win. 

Trust me, No One Likes to Lose – especially money. The amount an investor is willing to lose will depend upon her investment goals and entire portfolio allocation.


Venture Capital investing is the riskiest investment asset class. There are many articles and research comparing venture performance versus a composite index like the S&P 500 or NASDAQ. 

Only the top quartile of VC firms outperform the market and even among these, only a handful of Venture Capitalists are consistently successful. So, if you are approaching Angel Investors or Family Offices, please know that they probably only allocate 5% or less of their entire portfolio towards funding startups. 

The two figures below from the CFA Institute illustrate the points very well.

Fig 1: US VC returns are marginally lower than NASDAQ Composite
Fig 2: Top 25% of US VC Performance Vs the Bottom 25%

As you can see, an investor is better off taking the compounding effect of investing in an Index Fund because the IRR (Internal Rate of Return) of VC investing is lower than that of the stock market.

Research into VC funds since the 1980s shows that seven out of ten portfolio companies will lose all the money invested in those startups. This means that if an investor wants to diversify her portfolio of VC funds, then the majority will need to be written off. A VC fund investing in 10 startups will expect 7 to crash and burn, 2 to break even or give modest returns, and 1 to massively outperform becoming a unicorn or helping the VC get 20-40X in returns.

I built a nifty little tool you can use to check S&P500 returns since the 1990’s.

So, as you can see even though the media is filled with articles about easy money, and capital flowing freely, you and I both know that fund raising is very hard. Hopefully, the points above shed some light on why that is. 

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Why Do Investors Say No?

The Management Team

It takes 10-13 years on average to profitably exit a startup investment. We already know that 90% of startups fail. If the investor doesn’t believe the management team can execute well, then she won’t invest. This is why it’s important to have your dragon slaying stories ready. Show them how you’ve set goals, laid out a plan and executed your strategy in the past. Show them your strengths especially in grit and persistence.


I cannot stress how important consistent, transparent and timely communication with all your stakeholders is. Make it a habit of sending short updates, every quarter to each of your stakeholders as well as your potential investors (more on this later).  In 3-5 bullet points, talk about milestones achieved, challenges faced and what are upcoming events you’re excited about. 

Early on in my investment life, we invested in an amazing company with an excellent product and management team.  It is a fantastic company and is doing very well now. 

But the journey was painful. The company missed every single milestone by miles. They never once sent an investor report informing us what was happening, why were they missing their milestones, what was their contingency plan, how can they pivot, what is their burn rate etc. Despite several and repeated requests, they did not oblige us with the information. 

They needed a lot of additional funding to continue. Reluctantly and regretfully we declined each time because without transparent information we lost confidence. Even though we had invested a large sum of money, we could not justify issuing more checks. Investors always make decisions based on current information. All past decisions are sunk costs and will not factor in further investments when the investor feels she is in the dark. 

However, they have had a massive turnaround and Alhamdulillah I’m happy. But I am sure they could have had a much smoother ride a lot earlier had they truly trusted and invested in the relationship with their investors.

Do You Have Skin in the Game

Nobody’s going to risk investing in you, if you have not shown you do not have skin in the game. In other words, if you’ve not bet on your own company, most investors won’t either. 

Now a lot of us may not be lucky or privileged enough to have sufficient funds to even bootstrap an idea or borrow from friends and family. However, if you show me that you built your product in the evening and on weekends while studying or working a full-time job, to me, you’ve shown enough initiative and grit.

Time is also an investment. Show me you are persistent, creative in how you used your limited resources and strung together your Minimum Viable Product (MVP).

Product-Market Fit

Personally, I do not believe in growth at any cost. I want to clearly see that you have paying customers and that they are willing to pay you enough to be profitable. In other words, show me your path to profitability. Do you have recurring revenues? What is your customer churn rate? Make sure you are extremely well versed with your unit economics. 

It is ok to say you don’t know the answer to a question an investor may have, so long as you do your research and later, get back to her with an answer.

I also like companies that can sustain themselves if they do not get funding within a certain period of time. In other words, if you are agile enough to generate revenues and tighten your belts without compromising your product or service delivery, until funds come in, then you are a smartly managed company that I could back. 

For example, one of the companies we invested in was a SAAS startup and was already profitable. They wanted investment for growth. They won a place at a top Silicon Valley B2B Accelerator and has found a buyer after demo day. I’m happy to exit with a delightful profit. 


Once you know you are on a path to growth and that you would need funding 1.5 years down the line, start building a database of Angel Investors and VC’s. Do your research. For example, if you are in MedTech, then seek out angels and VC’s who have already invested in MedTech or have expressed interest in this sector. 

Start writing to them. Introduce yourself and DO NOT ask for money. Every quarter send them communication as stated earlier. Now, you will be on top of their minds.

If your metrics are showing consistent improvements in terms of multiples and not just incremental growth, the investor’s curiosity will be peaked. In fact, she may approach you herself and express interest in investing. Else, when you are ready to start raising funds, she will be a lot more receptive to you as she would already know you. 

In particular, she would know that you are consistent, honest, can deliver and execute. 

A startup catering to a big-box retail chain followed this relationship building method with me. They kept in touch with me consistently for the past 2 years. I liked the management team very much. They had not had any revenues when they first approached me, but since then have bagged some Big Box retailers as clients. I am personally not keen on retail related investments and usually do not invest in startups without traction. However, I have recommended them to others and have good wishes for them. It is about the right match and managing relationships. 

Term Sheet

My friend, Christina Andreasen, Head of Programs at Astrolabs, has been championing startups in the MENA region for the past 7 years. We were discussing what are the many reasons VC’s won’t fund startups.

Some of the reasons that may not be intuitive to founders have to do with Term Sheets and Co-Investors:

  • “I don’t want to co-invest with that investor.”
  • “I don’t agree with the terms given to the previous investor.”
  • “I don’t think the management team can execute.”

Early stage startups, please be aware of the term sheets you sign with the first few investors. Many do not understand the repercussions of the terms they have signed. 

You can use SAFE documents – Simple Agreement for Future Equity. You can find these freely on YCombinator. There are lots of articles and resources online on SAFE. Invest time in understanding them and do use them. As with everything there are pros and cons. You may get in trouble if you do not read and understand everything carefully.

There is an amazing startup that I desperately wanted to invest in but could not because they had signed a very bad term sheet with their first investor. This was at seed stage and I was willing to invest $100,000. The company had a prototype but no revenues yet.  However, the term sheet conditions stipulated that new investors must bring in a minimum, of $300,000. The original investor who invested $30,000 in kind (not cash), also stipulated that their shares would never be diluted, and they would always have 2 Board Seats always. Naturally, I did not like the terms. I even tried to get a friend who is a Wallstreet veteran to help this startup get out of the agreement but could not find an easy way to do so without a lot of capital and lawyer fees.

Please be very careful what you sign. Reputation matters. 

So, note that many times investors say no because the term sheet is unfavorable. Other times investors say no, because they do not trust or like the co-investors. You can take comfort in that its really not you, its them!

Value And Integrity

A few years ago, I was super excited to invest in a startup that was in a hot sector. I loved the story, the implications and the tremendous growth potential. After signing the NDA, I had a look at their financials. 

I was deeply concerned. The founders were paying themselves 8 X of what their least paid employee was paid. Moreover, the other employees were all white. The least paid employee was not. In fact, this full-time employee was paid 30% less than one of the part-time employees. 

I believe that if startups are asking for huge valuations before they have signed a single customer, then they need to make their payroll expenses fair and equitable. As an investor, I don’t want to pay bloated salaries when investing in the riskiest of asset classes. I believe startup founders should be fairly compensated and have the right incentive to grow the company. This is why I also don’t support excessive dilution of founder shares.

Additionally, I care about how diverse your team is. Does your senior management and team represent the customers you are trying to serve? For example, if there are no women at the top, I am less likely to invest.

Furthermore, I am definitely not investing in startups that make addiction a part of their customer “engagement” strategy. I do not care for “gamifying” algorithms that make users addicted to watching more videos or making more risky trades on your Fintech platform.

Final Thoughts

You may get a lot of rejections. Don’t take it to heart. Investing in startups are extremely risky and even the most generous of angels will pass on several investments. 

Ask for feedback. Many investors may not give you honest feedback, but a few will. Use the feedback wisely to improve your pitch, term sheet or address any other issue.

Build, cultivate and nourish relationships. Venture investing is a relatively small world. Your reputation may precede you, so keep it secure.

Finally, here is one investment I regret passing one. There is this amazing logistics startup that I knew would take off. Super effective founder, excellent product-market fit, revenue generating, multiple streams of revenue, etc. Nonetheless, I could not justify the valuation they were raising at. So, I passed.

I am regretting it today because this startup is soaring right now. So, you see, investors are not superhuman beings. Mostly, they are just lucky sometimes and unlucky other times, just like you.

Don’t do anything stupid, and don’t waste money. Let everybody else waste money and do stupid things, then we’ll buy them.

Jamie Dimon, CEO, JPMorgan Chase

You can click here to see all the resources I used for the blog.

I usually blog about investing in the stock market. If you would like help on how to budget, save or invest more, please feel free to reach me, on Twitter @saq3 or LinkedIn @Shaheeda Abdul Kader, or leave a message at I’d be happy to offer you my services. Please do check my other blogs here.


I am NOT a certified broker or financial advisor. Please DO NOT make investment decisions based solely on my blogs. My intention is to show you how to research stocks or funds for yourself so you can feel empowered and knowledgeable to do your own investigations and invest with confidence. It is best to consult with your broker or advisor if you have questions. You can also reach me and I’ll do my best to help you with your queries.

Shaheeda Abdul Kader

After 25 years of working for corporations, being an entrepreneur and managing investments for my family, I now want to help others find their financial freedom