After 15 years of looking through business pitches on the AIN platform, you get very quick at analysing investment opportunities and spotting the worst startup ideas. The most common theme is that the entrepreneur clearly hasn’t given their business enough thought to refine it for launch and certainly not enough to inspire an investor.
With this in mind, I am going to list five reasons why an investor might say no, and give real examples of some of the worst startup ideas that we’ve received over the years. It won’t surprise you to learn none of them turned into viable businesses.
>See also: Q&A – Sarah Turner, Angel Academe: ‘Women tend to talk more honestly about their business’
5 of the worst startup ideas…
#1 – Trying to solve a problem that doesn’t exist
One entrepreneur thought it would be a good idea to design shoes with TV screens in them. The rest of us realise there simply is no desire for people to walk around watching TV in their shoes. It’s pretty easy to see why this one never made its way onto the shop shelves.
#2 – The business is immoral or unethical
Investors tend to prefer to invest in something that they feel passionate about and will help improve people’s lives. For obvious reasons, investors will be instantly turned off if they feel the business is unethical. One such example was a “rabbit mashing” factory, which came from a Russian entrepreneur. Maybe something got lost in translation, but why would anyone want to mash rabbits? This may be a profitable endeavour, but it’s not something that is going to appeal to investors. We also always struggle to generate interest for betting/gambling companies, as that industry has such a bad reputation. In fact, the rise in demand for more ethical and sustainable businesses is the reason we launched our spin-off site SeedTribe, which is a community for businesses with social impact at their core.
#3 – The product is too niche
Sometimes you see business ideas that may have merit but the market size would be too small for the business to ever be viable. My top pick here was a shop that sold individual shoes for people with one leg. Although this would be a very useful service for some people, the number of target clients would be too small to generate enough revenues to sustain the business.
#4 – Being overambitious and unrealistic
At AIN we certainly love maverick geniuses, but entrepreneurs always run the risk of being overly ambitious. The winner in this category was a “crashless aeroplane” to eradicate plane accidents. You do get brilliant minds who come up with new inventions, but you have to be a little sceptical about people claim to have solved a problem which huge industries have failed to solve themselves. You obviously get breakthroughs from time to time, so do have to keep an open mind, but in this case, the business opportunity really fell away when we started to dig a little deeper and unfortunately it turned out to be an, ahem, flight of fancy.
#5 – Trying to fit a business into a catchy name
Sometimes entrepreneurs come up with a catchy or funny name and then try to shoehorn a business idea around this. One such example was a bar called Out with a club next door called Out Out. Although the concept was quite entertaining, that’s all it was. The entrepreneur had no prior experience in the hospitality sector and had done nothing else to develop the concept. It takes two minutes to come up with a catchy name or business idea, but the key component is what follows –developing and executing the whole business strategy.
>See also: Why small businesses should call upon the expert angels
… and 7 ways to make sure your business gets angel funding
On the flip side after 15 years you learn there are certain principles that are universal to ensuring startups do get funding.
A good idea with a clear USP
How is the business different to what else is in the market? What problem does it solve and is this a market that is showing great potential for future growth?
Progress and traction to date
Angel investors will want to look at the progress and traction that the business has achieved so far. The investor wants to see that the entrepreneur has managed to bootstrap the business as far as possible, spent previous funding wisely and proved that they have what it takes to grow the business.
Previous experience and expertise
Investors will want to know about the founders to ensure they have the relevant skills and quality to take the business to the next level. They will also be interested in the company’s previous investors to know the calibre of the people who have chosen to back it.
Quality of documents presented
Time-pressed investors need to quickly identify what makes the business different. With potentially hundreds of businesses on their radar you need to be able to have well-presented documents that quickly get to the nub of what makes the business stand out.
Most crucially there needs to be a reasonable valuation that will enable the investor to make a decent ROI when they exit. Investors are obviously looking to get involved because they want to make a return on their investment, so the potential ROI needs to be high enough to entice them in.
These should be reasonable and the entrepreneurs should be able to clearly explain the assumptions they made to calculate them.
This is critical. First impressions really do count and investors will often judge entrepreneurs on how quickly they respond to emails, answer their questions and provide the information or documents they require. It is one of the few ways the investor can judge first-hand how efficient and professional the entrepreneur is. It’s also important to stay responsive throughout the whole negotiation process to keep the momentum going and get the investors over the line.
Get these elements right and you can avoid the pitfalls, which is the best way to get your startup the funding it needs.
Mike Lebus is co-founder of the Angel Investment Network
Further reading on angel investment
How angel investment beats foreign direct investment