How demoralizing is spending hours on a pitch deck and associated materials only to get ghosted by the investor or receive an automated form rejection?

Why did they reject you? You will probably never know.

As chair of the selection committee, I just finished screening well over one hundred applicants to the North Bay Angels (NBA).

It’s unreasonable to ask the rest of the committee to look closely at more than twenty companies, so I need to eliminate the rest. Pre-screening the applications is a volunteer job, and I am busy with many other things, so it has to happen quickly.

Most companies get rejected in under one minute.

Over the last few cycles, I kept notes of why I eliminated each company and found eight factors that caused almost all the rejections. If you avoid these mistakes, we then take a close look at your company. Don’t let us get away with rejecting your company after a quick glance.

This article is part of our series of fundraising. You can find the whole series here.

1.    Investment Criteria

Like most angel groups and VCs, the North Bay Angels have specific investment criteria. We won’t consider any companies that don’t meet them.

Some examples of investment criteria are:

• Sector: green-tech, proptech, fintech, healthtech, …

• Technology: AI, solar, blockchain, …

• Founder Demographic: race, gender, sexual orientation, nationality, age, veteran, …

• Geography: Latin America, Africa, US, California, Bay Area, …

• At the NBA, we only invest in US companies and strongly prefer businesses headquartered within a few hours drive. Any startup that shows a non-US location gets eliminated instantly.

Sometimes, that creates mistakes. One company listed a foreign location on their application, but was actually a Delaware C-Corp. They were lucky I had a few extra seconds to tell them why I rejected them so they could correct me. Most are not that lucky.

2.    Not Venture-Investable

Most companies, even highly successful and profitable ones, are not good candidates for angel or VC investment.

Companies must have the potential to return at least 20x within seven years. We need that so our total portfolio provides reasonable returns despite the complete failure of most of the companies in which we invest.

If your projections don’t show that, you will be dropped.

Even if you project that kind of growth, I do a quick gut check. If I don’t buy it, I reject it.

There are three main reasons companies fail the sniff test.

Slow scaling. Growing that kind of company quickly enough to generate the returns we need is almost impossible.

Small market. The company has the potential to dominate its space quickly, but even owning 100% of the market does not produce a high enough valuation.

Too much competition. If I see several companies with the same idea in a short period, there are almost certainly several times that many that I have not seen. The odds that this one has the magic formula are very low.

3.    Incomplete Application

Nothing lets me reject a company as quickly as seeing an incomplete application.

We don’t ask for much. If you can’t provide the basis we request, I doubt that you are taking this process seriously.

Some examples are:

• Pitch deck missing, or provide a lengthy written document instead.

• Nothing on the size of the round

• No listed corporate structure (C-Corp, S-Corp, LLC, Partnership)

• No list of senior managers with bios.

• No location information

I don’t ask those founders to complete their applications. I just drop them.

4.    Model Not Interesting to Our Members

I have been with the NBA for over ten years and on the selection committee for most of that time.

I have a good sense of what companies will interest our members. Having them present is a waste of time when they have almost no chance of getting an investment. I would much rather give that time slot to a company with better odds.

Unfortunately, it can be hard to guess what kinds of companies will interest any given group. It often has more to do with history than the merits of that individual startup.

The NBA is in an agricultural area specializing in wine. Local entrepreneurs seem drawn to start alcoholic beverage companies, so we see lots of them.

Our experience with them has been disappointing.

It takes me a bit longer to eliminate startups on this basis because I always want to look for any significant distinct advantage they have over the dozens of others I have seen recently.

5.    No Moat

I eliminate a lot of companies because of a complete lack of moat or defensibility.

Many of these companies have a substantial opportunity and significant market. Unfortunately, it would be easy for large competitors to copy what they are doing.

Without some barrier to entry, these startups will get crushed the moment they demonstrate their model works.

When I look at these applications, I quickly scan for any sign of an effective moat, like:

• Effective intellectual property protections

• Significant exclusive partnerships

• Long R&D process (that can’t be accelerated with money)

• Unique team experience and capabilities

• Strong network effects and a believable path to achieving the needed scale quickly

• Large and hard to reproduce troves of proprietary data

If I don’t see anything like that, they are out.

6.    Lack of Business Model

Very often, pitches contain fantastic discussions of the problems they solve. Frequently, they also show intense customer demand for those solutions. Usually, they explain how their solution works and why it is superior to the competition.

Unfortunately, they often forget to talk about how their startup functions as a business. I am looking for things like:

• What key performance indicators will you track to keep the company on course?

• What are the unit economics?

• What are your customer acquisition costs (CAC)?

• What is your return on ad spend (ROAS)?

• How will your expenses scale with growth?

• What are your five-year financial projections? Based on what assumptions?

I need to know that you have thought about your startup as a business and that your model makes sense.

This also often ties to a lack of strategy and validation of assumptions, but I usually can’t know that at a quick glance (which is why they did not make this list).

7.    Not a C-Corp

I talked earlier about needing to know the legal structure of your company. This is why. Any answer but “US C-Corp” leads to instant elimination.

There may be different correct answers in other countries, but they almost always share one characteristic.

Investors want to back companies that issue stock. In the US, that means C-Corporation, which makes it easy to distribute ownership to founders, investors, and employees.

S-Corporations can do that too, but they also distribute profits directly to investors, complicating taxes and future acquisitions.

Most US investors have a strong preference for Delaware C-Corps. The reason for that is circular. At one time, it was because the laws and courts in Delaware were business and investor-friendly. Since then, many other states have adopted similar laws. Now, the preference for Delaware lies primarily in familiarity.

People know how things work in Delaware because most companies they invest in are Delaware companies. So, most people create Delaware companies because that will make investors most comfortable.

Fortunately, setting up a Delaware C-Corp is fast, easy, and inexpensive. A quick search will reveal dozens of reputable companies that can create one for you in hours.

Don’t tell me you will do it after you get an investment. I don’t want to deal with that risk or complexity. Just do it now and remove this objection.

8.    Valuation

Problematic valuations probably eliminate more applications than anything else.

Both overvaluing and undervaluing your startup can cause you to be rejected.

Getting your valuation right is hard because formal valuation methodologies give conflicting answers. You can’t just ask your investors since they have severe conflicts of interest.

This is a place where experienced independent advisors shine. They have the experience to help you set a valuation appropriate for your industry and stage.

The problem with low valuations is founder dilution. If you give away most of your company at the pre-seed stage, you will quickly start feeling more like an employee than the founder/CEO. Investors don’t want that. We need you to be a passionate owner, doing everything possible to make the company succeed.

Sometimes, these low numbers come about because the founder or inexperienced advisors can’t see how the company could be worth more when it has little if any, revenue. This misunderstands the situation.

In pre-seed investments, we agree on a valuation that balances investor upside with founder dilution. It should not be confused with what your company is worth as a whole. I frequently invest in startups with near-zero revenues at a $3-5 million valuation. But I would not consider buying the company for anything close to that.

More commonly, founders set their valuations too high. If I see an idea-stage company with a $6m valuation or one just seeing their first revenue at $15m, I will drop them almost immediately. I might check quickly to see if there are obvious extenuating circumstances like major grants that supported substantial R&D activities. However, I rarely find them.

Additionally, I know that our members strongly prefer companies with valuations below $10m. Unless there is something incredibly compelling about a particular startup with a higher valuation, I won’t move it forward.

The Takeaway

Getting funding from anyone, especially angel groups and VC, is at least as much about avoiding no’s as getting to yes’s.

Because of the volume of deals we see and the time required to understand them in detail, we are always looking for reasons to reject applicants as quickly as possible.

Don’t make things easy for your potential investors. Ensure that you avoid these reasons for early rejection and force us to take a close look at your business.

Make us work to say no. At worst, you will get an honest explanation of why you fell short. At best, you will have the chance to close that investor.

Angels also make snap judgments when you pitch live in person or on Zoom. Read an academic article on that pattern here.

Until next time, Ciao!

After reading this, you might want to check out this article on setting valuations for pre-revenue startups.