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5 reasons why your app won’t get funded

by in News on Sep. 8, 2011

We’ve talked to dozens of entrepreneurs who are trying to get their ideas funded by outside investment.  Of the entrepreneurs we talk to, less than 1% actually secure the funding they need.

#1: An investor has thousands of app investment opportunities right now

Generally speaking, investment markets move much slower than consumer markets.  From an investor’s perspective, they may still be on the fence about whether apps are just a fad or a viable long-term strategy.  Meanwhile, tens of thousands of entrepreneurs see the potential and are searching for investment.  There is an oversupply of entrepreneurs looking to develop apps, and an undersupply of investors willing to get into an “unproven” market.  Therefore only a tiny fraction of entrepreneurs actually get funded.

#2: You need a core skill to be investable

Most investors are in the business of making money for their shareholders.  In our experience, investment is a very cut-throat world.  If the value you are providing is “just” an idea, and merely connecting the money with a contractor like us, the few investors who are interested usually try to cut you out of the deal as “dead weight”.  So in the rare case that an investor is actually interested in funding the project, it will be in their interest to leave you out in the cold.  Essentially you become a middleman in the transaction between the developer and the investor, a middleman who is expendable.

An investor will not sign an NDA with you, so the only way to avoid this scenario is to have some skill that is necessary for project success.  This can be knowledge or industry contacts in the target industry, an existing business or customer base that can be leveraged to sell the new product, or proprietary IP that is required for the project to move forward.  In addition to making it more difficult to be cut out of a deal, these items will help your business to succeed in a competitive marketplace, and thus will also help you attract investment in a crowded market.

#3: No previous experience

Most investors only invest in individuals with previous entrepreneurial experience.  Just like a day job in which unexperienced individuals need not apply, investors and VCs are looking to fund individuals with a track record of successfully running companies.  An investor wants evidence that you know what you’re doing, and without it, you will not be able to stand out in a crowded market.

#4: No tech on the founding team

Investors are skeptical of contractors–and rightly so, there are many sketchy contractors in this market.  Investors generally want someone with technical experience in a prominent leadership role, if not the CEO of the company, to be invested in the product and tied to its success.  Investors are usually OK with using a contractor if the internal tech lead signs off on it–but you have to have that internal tech lead to get funded.  It’s incredibly difficult to hire a strong tech lead right now, investors know this, and so they don’t want to run the risk that you won’t find someone.  If you don’t have a technical co-founder attending the meetings with the VC, you won’t get funded.

#5: No pre-sales

It’s an old adage that investors tend to give the most money to people who need it the least.  Investors tend to look for pre-sales or customers who have already agreed to buy the product before it is even built.  This goes beyond just “market research” or “focus groups”–investors generally want to see Letters of Intent, Purchase Orders, and the like to gauge the real demand for the product.  Without these items, you will be unable to compete with the many entrepreneurs who will acquire them.

So how do I get funded?

One thing you can do is use this blog post as a checklist to fix deficiencies in your pitch.  If you don’t have any sales, go get them.  If you don’t have a technical co-founder, go find one.

Another thing you can do is to start thinking about sourcing funding from friends & family or from your employer.  These individuals already know and trust you, and will be more receptive to your pitch than an outside investor.